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Oil Fundaments Remain Unchanged Regardless Of Price Swings

By:
Barry Norman

Crude oil prices mid-week were showing gains of close to 10% only to reverse at the end of the week to end with a loss of more than 8%. The fundamentals

Oil Fundaments Remain Unchanged Regardless Of Price Swings

oil prices
Crude oil prices mid-week were showing gains of close to 10% only to reverse at the end of the week to end with a loss of more than 8%. The fundamentals controlling oil have barely changed in months with the exception of the US approving exports of oil the first time in 40 years and Iran returning to the global markets. These factors were well known and adjusted into market prices. The OPEC meeting in December through quota out the window officially, but that was the case for most of 2015 so the question to be asked is what is driving the markets.

WTI oil prices are now trading at 30.89 losing 83 cents on Friday. Brent Sea oil is available at 34.06. It was “a tricky week for crude-oil trading because the downside move in the U.S. dollar was fast and intense,” said Richard Hastings, macro strategist at Seaport Global Securities.

crude oil

Oil prices caught a bid recently on the U.S. dollar downdraft, “but this is a dangerous game,” he said. “If the USD declines too much, then the Bank of Japan and the European Central Bank will respond with more aggressive stimulus and accommodation measures to pressure their currencies lower.” That would contribute to gains for the greenback.

Overall, oil’s fundamentals remain weak due to a supply overhang, as major producers have refused to cut output despite prices falling sharply for nearly two years.

In a report Friday, Wood Mackenzie said there has been “minimal production shut-in so far in this [price] downturn,” with the decline equivalent to less than 100,000 barrels a day or 0.1% of global production.

The huge oil glut is unlikely to improve anytime soon, as underscored by the most recent US Crude Oil Inventories report, which showed a surplus of 7.8 million, much higher than the estimate of 3.7 million. This was the second straight week that oil supplies were much higher than expected, and these readings will only increase worries that demand for oil products has weakened. The Chinese slowdown has pushed oil prices sharply lower, as the Asian giant is world’s second largest consumer of oil. Low oil prices continue to contribute to weak inflation levels around the world, and inflation in the US remains well short of the Federal Reserve’s target of 2.0%.

oil production - cuts

Wood Mackenzie said that U.S. tight oil, also known as shale oil, has actually seen a fall in production costs over the last 12 months because of gains in efficiency. Given that, tight wells that are on-stream are “not at immediate risk of being shut-in,” the report said.

That bodes ill for oil heavyweight Saudi Arabia, which has been reluctant to cut output to help boost prices as it fears a further loss in its share of the oil market to shale producers.

Overall, oil producers’ reluctance to ease up on the taps has been very apparent. Members of the Organization of the Petroleum Exporting Countries, as well as non-OPEC members such as Russia, have been in the news often lately, putting the prospect of an output reduction out there. But so far, it’s been all talk and no action. But despite the reaction in prices, few appear to be convinced that all the speculation will result in anything concrete enough to stem the big losses in oil.

Still, there are signs that the Saudi strategy is starting to work. New volumes in tight oil that have been added have slowed sharply as “full life cycle economics require an oil price in the range of $40-$60,” Wood Mackenzie said.

brent oil

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