Its mid-winter in Russia, and the snow is deep in some parts of Moscow. Meanwhile in Venezuela the economy is close to meltdown, and its hard to find even essentials in Caracas. So it is no real surprise that this month saw their Oil Ministers head for “important discussions” in the warmer climate of the Middle East. Similarly, the Gulf States were happy to provide hospitality:
- Decades of bitter experience have proved that neither country ever delivers on its promises to restrain oil output
- But just news of the meeting led credulous investors to bid up oil prices, making the discussions worthwhile
US oil and gas producers were even more delighted. Hopes of higher prices have enabled them to sell $5bn of new equity since the New Year – a welcome boost to their balance sheets. And prices on the forward curve for future delivery moved up to $45/bbl, triggering a surge of hedging interest from companies keen to lock in profitable economics for another few months. As the head of Pioneer Natural Resources told his investors:
“You’ve got to use events like that to put hedges in the marketplace”
Plus, of course, the high-frequency traders, who now dominate energy markets, were delighted. Prices have raced up and down by several percent, providing them with effortless profitability.
Back in the real world of supply and demand fundamentals, nothing has really changed.
Russia has already denied that it actually agreed to a production freeze, and also denied that it intended to put pressure on Iran to agree, Instead, it is finalising a $5bn loan to kick-start Iranian purchases from Russia, to support its collapsing economy. And even news that the US rig count is back at 1999 levels has failed to show any major link as yet with declining production.
Thus the key to the outlook continues to focus on the price chart above:
- It first signalled the coming collapse in August 2014, when the 5-year “flag shape” finally broke down
- This led to the expected freefall in prices, as the bulls lost the power to sustain higher prices
- Then prices went below the 200-day exponential moving average, confirming a bear market
- Next, they dropped back below the $36.20/bbl level, and returned to the pre-2005 price era
The events of the past few weeks have provided an opportunity to test this level again. And, so far at least, it has acted as resistance to higher prices. This is typical of such moves, where traders understand that major change has taken place in the fundamentals, and that previous support levels have turned negative.
No doubt Saudi Oil Minister, Ali Al-Naimi, will be happy to continue talking up prices tomorrow, when he speaks in Houston. But markets continue to suggest that the collapse has not yet hit bottom. US inventories have reached new record levels, and current supply/demand balances continue to support the International Energy Agency’s suggestion that the recent rally was “a false dawn”.
$30/bbl was always my forecast price for oil in today’s New Normal world. So I am not arguing that any further fall would be sustainable on a longer-term basis. But it would certainly be unusual, to say the least, for prices to bottom at today’s level, whilst there are still so many players who believe they “must” go higher.
WEEKLY MARKET ROUND-UP
My weekly round-up of Benchmark prices since the Great Unwinding began is below, with ICIS pricing comments:
Brent crude oil, down 70%
Naphtha Europe, down 66%. “Crack spread sinks deeper into negative territory”
Benzene Europe, down 58%. “There are several downstream turnarounds on the horizon from March into May, which could lead to an excess of benzene.”
PTA China, down 46%. “Downstream end-users in the polyester industry are not expected to increase their consumption rates until after the 15th day of the first month of the lunar new year”
HDPE US export, down 42%. “Domestic prices for export moved up a little during the week on sentiment that producers might have a chance for obtaining some increase domestically in March”
¥:$, down 11%
S&P 500 stock market index, down 5%