Connect with us

Markets

The Glut Strikes Back as Oil Returns to Brink of Bear Market

Published

on

Oil glut

The bullish spirit that gripped oil traders as industry giants from Saudi Arabia to Goldman Sachs Group Inc. declared the supply glut over is rapidly ebbing away.

Oil is poised for a drop of 20 percent since early June, meeting the definition of a bear market. While excess crude production is abating, inventories around the world are brimming, especially for gasoline, and a revival in U.S. drilling threatens to swell supplies further. As the output disruptions that cleared some of the surplus earlier this year begin to be resolved, crude could again slump toward $30 a barrel, Morgan Stanley predicts.

“The tables are turning on the bulls, who were prematurely constructive on oil prices on the basis the re-balancing of the oil market was a done deal,” said Harry Tchilinguirian, head of commodity markets strategy at BNP Paribas SA in London. “It’s probably going to take a little longer than they expected.”

Oil almost doubled in New York between February and June as big names from Goldman and the International Energy Agency to new Saudi Energy Minister Khalid Al-Falih said declining U.S. oil production and disruptions from Nigeria to Canada were finally ending years of oversupply. Prices are set for their biggest monthly loss in a year amid a growing recognition the surplus will take time to clear.

“There’s lots of crude and refined products around,” said David Fransen, Geneva-based head of Vitol SA, the biggest independent oil trader. “Demand growth has faltered a bit.”

The stockpiles of crude and refined oil that built up in industrialized nations during the years of oversupply remain formidable, standing at a record of more than 3 billion barrels, according to the Paris-based IEA. Traders struggling to sell cargoes are hoarding the most barrels on board tankers at sea since the end of the 2008-2009 financial crisis, the agency estimates.

In some countries the glut seems to be getting bigger, with weekly U.S. government data on Wednesday showing a surprise inventory increase in the world’s biggest oil consumer at at time when summer driving demand should deplete stockpiles.

The latest challenge for the market is “a shift in the surplus from crude to products,” Jeff Currie, head of commodities research at Goldman Sachs in New York, said in a Bloomberg Television interview Wednesday. Refiners churned out gasoline earlier in the year to take advantage of cheap crude, and stockpiles of the motor fuel are now at the highest for the time of year in at least 20 years, EIA data show.

The next move lower could come as crude production ramps back up, said Adam Longson, an analyst at Morgan Stanley in New York. Canadian oil-sands producers have restored what was halted in May when wildfires menaced more than 1 million barrels of daily output. Nigeria has partially recovered after militant attacks curbed production to a three-decade low, according to the IEA.

In the U.S., production declines have leveled off over the past three weeks, EIA data shows. The weekly count of active oil rigs published every Friday by Baker Hughes Inc. has recorded its longest run of increases since August.

Hidden Surplus

“Did the glut disappear in the first place?” asked Eugen Weinberg, head of commodities research at Commerzbank AG in Frankfurt. “It was masked for a while by the shortfalls in Nigeria and Canada, but it did not disappear.”

Still, banks from Citigroup Inc. to Barclays Plc and Societe Generale SA are confident the overall re-balancing of the market remains on track, despite the current price retreat, and that markets will recover by the end of year. The latest sell-off reflects the strength of the dollar, which curbs investors’ appetite for commodities, rather than any worsening of supply-demand fundamentals, according to Goldman Sachs.

“I would call it a bump on the road towards a looming rebalancing,” said Miswin Mahesh, an analyst at Barclays in London. “The supply side is adjusting sharply and we will see it slow down a lot faster than demand from the fourth quarter onwards. The low price is creating a one-two punch moment for the supply side, taking off both current and future supplies.”

The recovery will take prices up to $50 a barrel by the end of the year, according to Barclays and Commerzbank. In the meantime however, sentiment has soured so much that further losses to $40 are inevitable, Commerzbank’s Weinberg said. West Texas Intermediate crude futures lost as much as 1.4 percent to $40.57 a barrel on Friday.

“The oversupply will diminish,” Weinberg said. “But the market is deaf in one ear right now. Sentiment was too pessimistic at the beginning of the year, extremely bullish in June, and now back again to pessimism.”

CEO/Founder Investors King Ltd, a foreign exchange research analyst, contributing author on New York-based Talk Markets and Investing.com, with over a decade experience in the global financial markets.

Continue Reading
Comments

Markets

Markets Today – Rollercoaster Ride, Fed, Earnings, Ukraine, Oil, Gold, Bitcoin

Published

on

By Craig Erlam, Senior Market Analyst, UK & EMEA, OANDA

It’s been a rollercoaster start to what was always going to be a massive week in the markets and there’s little reason to expect that to change in the coming days.

The turnaround on Monday was incredible. From eye-watering losses to ending the day in the green; it’s not often you see that kind of action. Investors will no doubt be relieved but that could prove to be short-lived. US futures are back in negative territory ahead of the open – albeit to a much lesser degree at the moment – and even at the close on Monday, the Nasdaq was more than 13% off its highs.

The next couple of days will be huge. So much could hang on the communication from the Fed tomorrow and whether they strike the right balance between taking inflation seriously and not raising rates too aggressively. It’s a tightrope situation but if the central bank can find the right balance, more may be tempted by these levels.

It’s not just on the Fed, of course. On Monday, it was geopolitics that appeared to tip investors over the edge. The reaction looked over the top but that is indicative of the level of underlying anxiety in the markets at the moment. And if things don’t improve this week, we may see more episodes like that.

Which brings us to earnings season and a week in which numerous companies release fourth-quarter results, including a number of big tech names. A disappointing start to the season hasn’t helped to lift the mood but that could change this week. If not, the January blues could turn into something far more unsettling.

Fundamentals remain bullish for oil

Oil got caught up in the sell-everything panic at the start of the week, sliding more than 3% at one stage before recovering a little. There wasn’t much sense behind the move, but the fact that the dollar was strengthening and crude was already seeing profit-taking after peaking just shy of $90, probably contributed to it.

The market remains fundamentally bullish and conflict with Russia does nothing to alleviate supply-side pressures. If anything, the risks are tilted in the other direction, not that I think it will come to that. Nor does the market at this point, it seems.

Still, it was only likely to be a matter of time until oil bulls poured back in and prices are up again today. The correction from the peak was less than 5% so that may be a little premature, but then the market is very tight so perhaps not.

Conditions remain favourable for gold

Gold continues to be well supported at the start of the week, following some turbulent trading conditions and dollar strength. It continued to hold over the last couple of sessions around $1,830 and has pushed higher with $1,850 now in its sights.

The yellow metal is pulling back a little today, off a few dollars, but it remains in a good position. There still appears to be momentum behind the rally which could continue to take it higher. A move through yesterday’s lows could see that slip but at this point in time, conditions continue to look favourable. Of course, the Fed tomorrow could have a huge role to play in whether that continues to be the case which may explain the consolidation in recent days.

A strong recovery for bitcoin

Bitcoin rebounded strongly on Monday, alongside other risk assets that had also been pummelled earlier in the day. It’s trading a little lower today but that won’t be a major concern at this stage as broader risk appetite is holding up so far. Whether that is sustainable will determine how bitcoin responds and that may depend on the Fed tomorrow.

Bitcoin found support at $33,000 on Monday which isn’t far from a hugely important support zone around $30,000. If risk appetite takes a turn for the worse again, we could see that come under severe pressure. If the price can hold above here in the short term, it could be a very positive sign.

Continue Reading

Markets

Markets Today – Russia/Ukraine, Fed, Earnings, PMIs, Oil, Gold, Bitcoin

Published

on

U.S Dollar - Investors King

By Craig Erlam, Senior Market Analyst, UK & EMEA, OANDA

Another woeful start to trading on Monday, as heightened geopolitical risk compounds investor anxiety and drags on risk assets.

It could be a make or break week for the markets, with the Fed meeting on Wednesday, big tech earnings, and ongoing tensions on the Ukraine/Russia border. That may sound a bit over the top given how deep a correction we’ve already seen, particularly in the Nasdaq, but it could get much worse before it gets better.

Wednesday is going to be massive. The Fed needs to strike the right balance between taking inflation seriously and not wanting to cause further unnecessary turmoil in the markets. Not an easy balancing act when four hikes are already priced in, alongside balance sheet reduction, and some are arguing it’s not enough.

That’s a lot of pressure for a meeting that’s not really live but investors will be hanging on every single word. It won’t take much for the Fed to add to the anxiety but if they manage to strike the right chord, it could help settle the markets and draw investors back in.

And then there’s earnings. Netflix got things off to a rotten start for big tech but there’ll be plenty of opportunities to turn that around this week. The Nasdaq has fallen more than 16% from its highs and sits very close to bear market territory. Will investors be tempted back in at these levels if the other big tech names deliver?

Whatever happens, it promises to be a really interesting week in the markets and one that could go terribly wrong or be the turning point. Perhaps that’s oversimplifying things but when fear is in control as it seems to be now, it creates these kinds of extremes.

Weak PMIs as omicron weighs

The PMIs we’ve seen today won’t exactly be helping the mood but we should take them with a pinch of salt given the impact that omicron will have had. The services sector was hit particularly hard, especially in the US, but again that’s to be expected under the circumstance. While the data won’t have helped to lift the mood, it won’t change the outlook for interest rates either. There was cause for optimism in some of the UK service’s forward-looking components which bodes well for the coming months, even as households and businesses are hampered by higher energy costs and taxes.

Oil lower but fundamentals remain bullish

Oil prices are lower at the start of the week as we continue to see some profit-taking alongside another hit to risk appetite. It’s been a remarkable rally and there’s nothing to suggest that prices are peaking. It’s just come a long way in a short period of time but the fundamentals continue to look bullish.

Despite it already trading at very elevated levels, I wouldn’t be surprised if any corrective moves are relatively shallow. There’s still a big issue on the supply side, with OPEC+ unable to even come close to monthly addition targets and it’s happening at a time of strong demand.

Not to mention the fact that tensions are seriously heightened between Russia and the West and an invasion of Ukraine is becoming an increasing possibility. When energy markets are already so tight, the additional risk premium should continue to support prices.

Gold pares earlier gains

Gold got off to a decent start this week as it continued to do well in risk-averse trade, but it has since given those back to trade marginally lower on the day. Whether its performance recently is a safe haven move, inflation hedge, or a combination of the two, it’s certainly been supportive for the yellow metal. And now it’s found strong support around $1,830 where it had been seeing plenty of resistance in recent weeks before breaking higher.

That could be a bullish confirmation signal and there still appears to be a healthy amount of momentum, even as the dollar is performing well. The next big test for gold is $1,850, where it struggled on Thursday before profit-taking kicked in.

A major test of support coming for bitcoin

Another miserable day for bitcoin which is continuing to slide after surpassing the 50% mark a little over two months after hitting record highs. It’s in freefall once more and really suffering in these risk-averse markets.

We’ve seen this before though, extreme moves work both ways and while the market has matured over the years, it is still a highly speculative, high-risk asset class. And high-risk assets are being pummelled.

But bitcoin now has a real test on its hands. The psychological blow of losing $40,000 is nothing compared to what happens if $30,000 falls. This is a major level of technical support that held throughout 2021, despite numerous tests early in the year and then throughout the summer. If this falls, it could get very messy.

Continue Reading

Crude Oil

Concerns Over Interest Rates Hike and Stronger US Dollar Weighed on Oil Prices

Published

on

Crude Oil - Investors King

Oil prices dropped on the back of growing concerns over the possibility of the US Federal Reserve raising interest rates and the surge in dollar value against global counterparts.

Brent crude oil, against which Nigerian crude oil is measured, fell by $3.69 from $88.86 a barrel it peaked earlier today to $85.17 per barrel when the New York market opened. The US West Texas Intermediate crude oil shed $3.91 to $81.9 per barrel, down from $85.81 it opened during the Asian trading session.

The decline in oil prices was after the US dollar jumped to a two-week high on Monday against its global counterparts, largely due to the tension between Russia and the West over Ukraine and the likelihood of the Fed raising interest rates this week.

Francesco Pesole, a strategist at ING Bank, said the increase in dollar value could stall if the Fed signalled a preference for balance sheet reduction against the widely expected interest rate as means to tighten policy.

“If markets see the Fed willing to let balance sheet reduction do the heavy lifting, that may force a scaleback in forecasts for the number of rate hikes,” he said.

“The dollar will find more support from actual rate hike expectations than expectations of draining liquidity out of the market.”

Carsten Fritsch, an analyst at Commerzbank, explained that the crisis in both Ukraine and the Middle East “justify a risk premium on the oil price because the countries involved – Russia and the UAE – are important members of OPEC+”.

Tension in the United Arab Emirates rose on Monday following an interception of two Houthi ballistic missiles targeting the Gulf country after a deadly attack a week earlier.

Continue Reading
Advertisement




Advertisement
Advertisement
Advertisement

Trending