The rout is on. From $61.43 a barrel on June 10, WTI is now hovering just around $48. The Brent has also breached the $55 floor. What a turnaround in six weeks. This is mauling! Continuing glut, expectations of more from Iran and demand worries from all around, especially China, are contributing to the current woes.
Ample supply, from all around, continues to weigh on markets. The US is currently producing about one million barrels above the year-ago level. According to the Energy Information Administration (EIA) report last week, the US crude oil stocks rose 2.5 million barrels to 439 million barrels, trumping expectations for a drop in inventory. Analysts polled by Reuters had been expecting the inventory figure to come down by about the same amount, not increase.
The level is almost 93 million barrels more than were in storage this time last year, which is traditionally a time of strong demand for oil because of the busy summer driving season.
“The numbers showed an increase of 813,000 barrels at the oil refining hub of Cushin, Okla,. where virtually every barrel of American oil passes through at some point, Nomure Securities analyst Shigeki Matsumoto said. “The fact that Cushing contributed almost one third of the increase added to the downside response,” Jim Ritterbusch of Ritterbusch & Associates also said in a note to clients, CBC News reported.
With the US production remaining near the highest level in four decades, output from Saudi Arabia and Iraq surging to record levels and Iran staying focused on enhancing exports after reaching a nuclear agreement with world powers, the glut showed little sign of abating.
Contraction in China's factory sector and the strengthening of the dollar against a basket of currencies, also helped further maul the markets. Adding to demand concern is the fact that activity in China's manufacturing sector shrunk at the fastest pace in 15 months in July.
The tumbling market has already erased more than $100 billion in market value from the companies in the Bloomberg Intelligence North America Independent Explorers and Producers Index.
Markets are bearish. “This market is headed to $40 before we go to $60 again,” Bill Baruch, chief market strategist at Chicago-based iiTrader was quoted by CNBC as saying. In terms of demand, Baruch says the long-term picture looks bearish, with the International Energy Agency saying in a July report that global oil demand is set to slow in 2016. “We have passed peak demand,” he insisted, indicating a turnaround in market fortunes may not be on horizon - at least in the short term. And when it comes to supply, Iran could start exporting more oil soon while Saudi Arabia “has shown a strong commitment to a production war,” he told CNBC. “The second battle has essentially just begun.”
Morgan Stanley is now insisting; the current bearish outlook could be the worst oil crash in 45 years, rivaling the iconic price crash of 1986. “On current trajectory, this downturn could become worse than 1986,” Morgan Stanley's Martijn Rats wrote in a note to clients early last week.
“We have been expecting the current downturn to be as severe as the one in 1986 – the worst for at least 45 years – but not worse than that,” Rats wrote. But now with oil rolling over again, it is starting to look like a worst-case scenario could be in play.
In February, the firm predicted a market rebalancing later in 2015. However, that forecast is undergoing a change now and with reasons. Explaining the earlier forecast, analysts Martijn Rats and Haythem Rashed underlined, “we anticipated that OPEC would not cut, but we didn't foresee such a sharp increase. In our view, this is the main reason why the re-balancing of oil markets had not yet gained momentum.”
The forward curve of oil prices is suggesting that there will be little recovery in the coming years, as well as an industrial downturn worse than 1986, they forecasted.
However, some still continue to see some light at the end of the tunnel. UBS is of the view that the scene is set for a recovery over the next three years - but still not in short term - with potential spikes of above $100. Nik Burns of UBS believes that while the markets are likely to stay oversupplied for another 18 months, a turnaround is likely sooner rather than later, given the much higher prices needed to stimulate investment in new production that will soon be needed to meet growing demand. “You only really have one year to 18 months of growth in demand before you get the markets back into balance: the market is going to look through that,” he said at a briefing in Sydney. “Supply just is not going to be there: that could result in prices heading up to or potentially north of $100 a barrel.”
Burns added that no oil company had sanctioned a new conventional oil development for the last six months as low prices deterred any new investment in the result. This would result in a material drop in conventional oil supply starting to emerge within 18-36 months as fields naturally decline, he emphasized. While some expect the latent capacity in US shale liquids to be able to fill that gap, UBS believes that is unlikely. “Is there sufficient headroom for US shale to be the incremental supplier of oil in the medium term? Our view is - it's not: it's unlikely to have sufficient firepower or capacity to meet future demand growth, therefore you do need additional supplies outside the US, and if you need additional supplies outside the US you need a higher price to justify that investment,” he added.
The softening oil market and consequent drop in oil revenues are forcing the single product economies of some of the oil-rich Gulf states to undertake major structural changes. Fuel subsidies, that globally reached $5.3 trillion this year, are under focus. An IMF report in May said that the fuel subsidies are to touch $29 billion mark this year in the UAE and $106.6 billion in Saudi Arabia.
With considerably lower oil revenues, oil rich country UAE is set to register a fiscal budget deficit for the first time since 2009. In order to balance the budget, the country has announced removing fuel subsidies from next month, linking gasoline and diesel prices to global oil markets.
The change is part of the government's plan “in diversifying sources of income, strengthening the economy and increasing its competitiveness in addition to building a strong economy that is not dependent on government subsidies,” Suhail Al Mazrouei, the UAE energy minister said in the statement announcing the change.
Thunderstorms are on horizon and immunity could not be granted to anyone, anymore and anywhere!
