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

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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.”

Is the CEO/Founder of Investors King Limited. A proven foreign exchange research analyst and a published author on Yahoo Finance, Nasdaq, Entrepreneur.com, Investorplace, and many more. He has over two decades of experience in global financial markets.

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Markets

Black Friday Lull

We’re seeing subdued trading at the end of the week, with the absence of the US leaving markets lacking any notable direction.

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

We’re seeing subdued trading at the end of the week, with the absence of the US leaving markets lacking any notable direction.

This isn’t really unusual and at the end of the week too, it really makes sense. Barring a flurry of big headlines from elsewhere, we could now see equity markets just drift into the weekend with investors already having an eye on next week.

Perhaps today people are trading in their charts for some Black Friday deals, the outcome of which will certainly be on everyone’s radar. Going into the holiday season, we’ll get an early idea of the state of play for household spending in the midst of a cost-of-living crisis.

Of course, it will naturally be difficult to distinguish how much of that bargain hunting will prove to be holiday season shopping brought forward in an attempt to get the “best deals”. But if Black Friday shopping takes a hit this year, it won’t bode well for the rest of the holiday period which is so important to retailers.

PBOC cuts the RRR

The PBOC cut the RRR by 25 basis points this morning in a bid to support the economy which is once more going through a difficult period. How effective that will prove to be when cities are seeing restrictions and effective lockdowns reimposed is hard to say. But combined with other measures to boost the property market and ease Covid curbs, the cut could be supportive over the medium term when growth remains highly uncertain.

Oil pares losses as price cap talks continue

Oil prices are higher on Friday, continuing to pare losses after being hit heavily in recent weeks by surging Covid cases in China and discussions around the price cap on Russian crude.

Lockdowns in all but name appear to be popping up in major Chinese cities in an attempt to get a grip on record cases which will weigh heavily on economic activity once more and in turn demand. It’s now a question of how long they last but clearly investors’ enthusiasm toward the relaxation of Covid restrictions was a bit premature.

Talks will continue on a price cap but it seems it won’t be as strict as first thought, to the point that it may be borderline pointless. That’s hit oil prices again this week as the threat to Russian output from a $70 cap, for example, is minimal given it’s selling around those levels already.

Gold establishing a range ahead of key data releases

Gold is marginally lower today but has been quite choppy throughout the session, and broadly lacked any real direction. We could be seeing a little profit-taking as the dollar edges higher following the relief rally that followed the Fed minutes.

The yellow metal is trading roughly in the middle of what may be a newly established range between $1,730 and $1,780, potentially now awaiting the next catalyst ahead of the December Fed meeting. With another jobs and inflation report still to come, a lot could change between now and when the FOMC next meets.

Bitcoin still extremely vulnerable

Bitcoin is edging lower again today after recording three days of gains. That dragged it off the lows but didn’t really carry it that far from them. It’s trying to stabilize around the $15,500-$17,000 region and weather the storm but I’m not sure it will be that easy. There’s likely more to come from the FTX collapse and the contagion effects, not to mention potentially other scandals that could be uncovered. This may continue to make crypto traders very nervous and leave the foundations supporting price extremely shaky. ​

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Crude Oil

Lack of Inflows, Revenue Shortage Plunge Nigeria’s Excess Crude Account By 89%

The ECB balance declined from $4.1 billion recorded in November 2014 to $472,513

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Weak foreign revenue inflow amid fluctuations in the global oil market has plunged Nigeria’s Excess Crude Account (ECA) by 89% in the last eight years.

The Excess Crude Account (ECA) is an account used to save excess crude oil revenue by the Nigerian government.

The ECB balance declined from $4.1 billion recorded in November 2014 to $472,513 in the same period of 2022, according to a statement from the Ministry of Finance, Budget, and National Planning.

Economists attributed the substantial decline to the nation’s persistent depreciation in foreign revenue inflows and the struggle with crude oil production amid global uncertainty.

According to Jonathan Aremu, professor of economics at Covenant University in Ogun State, the decline was a result of constant withdrawal without replenishment.

“For you to increase the ECA, the oil price must rise above the budgeted price. If it does not, nothing goes in.  Also, if what you are spending is higher than what goes in, it depletes. This is the situation,” he noted.

On Thursday, crude oil prices declined following the Group of Seven (G7) nations’ proposed plan to cap Russian oil at $65-70 a barrel.

Brent crude oil, against which Nigerian oil is priced, declined to $85 a barrel while the West Texas Intermediate (WTI) crude fell by 0.6% to $77.48 a barrel.

Despite the fact that the benchmark price for oil in the 2022 budget was $57, the price of oil today is still about $30 higher. In spite of higher oil prices, the ECA has been on a decline since early 2022, suggesting that the issue is internal.

“Nigeria’s crude production plunged below 1 million barrels per day (mbpd) for the first time since Buhari became President this year and has averaged about 1.2 mbpd most part of 2022. Therefore, it is impossible to take advantage of the Russian-Ukraine war inflated oil prices like we did during the Gulf war under former president Ibrahim Babangida,” Samed Olukoya, CEO/Founder Investors King Ltd stated.

The government needs to address internal issues, revamp refineries, reduce oil theft and diversify the economy to reduce overexposure to global oil fluctuations.

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Crude Oil

Crude Oil Opens at $85 as G7 Nations Move to Cap Russian Oil

The Group of Seven (G7) proposed to cap Russian crude oil at $65-$70 a barrel

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Crude oil

Crude oil opened lower on Thursday, declining to a two-month low following the Group of Seven (G7) proposal to cap Russian crude oil at $65-$70 a barrel.

A greater-than-expected build in U.S. gasoline inventories and widening COVID-19 controls in China added to downward pressure.

Brent crude dipped 50 cents, or 0.6%, to $84.91 a barrel, while U.S. West Texas Intermediate (WTI) crude fell by 46 cents, or 0.6%, to $77.48 a barrel.

Both benchmarks plunged more than 3% on Wednesday on news the planned price cap on Russian oil could be above the current market level.

The G7 is looking at a cap on Russian seaborne oil at $65-$70 a barrel, according to a European official, though European Union governments have not yet agreed on a price.

A higher price cap could make it attractive for Russia to continue to sell its oil, reducing the risk of a supply shortage in global oil markets.

That range would also be higher than markets had expected, reducing the risk of global supply being disrupted, said Vivek Dhar, a commodities analyst at Commonwealth Bank in a report.

“If the EU agree to an oil price cap of $65‑$70/bbl this week, we see downside risks to our oil price forecast of $95/bbl this quarter,” Dhar said.

Oil and gas exports are forecast to account for 42% of Russia’s revenues this year at 11.7 trillion roubles ($196 billion), according to the country’s finance ministry, up from 36% or 9.1 trillion roubles ($152 billion) in 2021.

The G7, including the United States, as well as the whole of the European Union and Australia, are planning to implement the price cap on sea-borne exports of Russian oil on Dec. 5.

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