Crude Oil Prices Continue To Decline, Why?
$OIL, $USO
Crude Oil prices rallied North Monday, the rallied South Tuesday. It started at around 48 bbl Brent Crude was at one point hovering near the 50 psych mark, but the rally faded and the international benchmark is now falling back to 48 bbl.
The catalysts for the move North had been the fall in US inventories and the US interest rate hold, which weakened the Buck and kept prices low for traders in other currencies.
The Big Q: Why haven’t prices increased more strongly?
Analysts identify 3 Key reasons, as follows:
1. A weaker global economic outlook is raising fears that demand for Crude Oil will soften, leaving the market overstocked despite signs that production is finally starting to slow. A Bearish message from the Fed in its rates commentary on China, the world’s 2nd largest Crude Oil consumer, has spooked traders across markets.
2. The existing overhang is huge, having built up over the course of a turf war between the OPEC cartel and a booming US shale Oil industry over the past year, and will take some time to clear. The recent W-W fall in US stockpiles still leaves them up around 25% on this time last year, with reports suggesting that reserves are at “record” levels and production is still outstripping supply.
Goldman Sachs, ANZ and other investment bank analysts have said it could take to the end of Y 2016 and a collapse in US output for supplies to begin to fall in a meaningful enough fashion for prices to return to profitable levels for most production.
3. Cutbacks are only happening in the US, with exports elsewhere, not least from OPEC and its de facto leader Saudi Arabia remaining high. In fact, the message from the OPECof late is that the stark predictions for US shale Oil are a sign it is winning its fight for market share and will hold to its internecine strategy, despite pain for some of its own members. And of course, there is the likelihood of Iranian exports ramping up soon too.
All of this means that while traders are modestly reducing “Short position” bets on falling prices on the US benchmark WTI Crude Oil they continue to gamble on a down trend in Brent Crude. The differential between the 2 prices is also closing towards 2, down from an average ‘spread’ of 5 to 10 in recent years.
Crude Oil is in a downtrend, traders selling the rallies.
Stay tuned…
HeffX-LTN
Paul Ebeling
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