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Eithne Treanor: Gloomy week ends on a high note

It has been a pretty gloomy week for oil traders - but what lies in store?
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The week ended on a slightly brighter note after a gloomy start.

The oil market was shrouded in gloom all week as prices fell to low levels not seen in three months.

A glimmer of hope came back to the market by the end of the week and in early trading on Friday, Brent crude was heading back towards US$46 with WTI holding above US$43 a barrel.

It's a combination of factors that's keeping the oil price in the doldrums.

American inventories continue to be high, up 2.3mln barrels last week and stocks continue to grow according to latest industry indicators.

Supply continues to outpace demand despite optimistic economic indicators and the prospect of an unofficial production freeze agreement now seems unlikely.

There’s been little good news to drive a reactionary market hooked on sentiment and hope. While gasoline sales have been buoyant in the US, its now the end of the driving season, so the market will be looking for other factors to help boost demand.

American manufacturing data was poorer than expected with traders and investors are now anxiously waiting the latest US employment data.

Preliminary figures were hopeful as the world’s biggest oil consumer remains fragile.  

Talk of an interest rate hike from the US Federal Reserve was back in the headlines this week, but while such a move might indicate a strengthening of the US economy, it would also help boost the dollar and depress the oil price.

Not everyone believes the American economy is looking healthy. The president of Prestige Economics in Texas, Jason Schenker, was disappointed with the manufacturing figures.

He has been warning of recessionary tendencies for many months and said: “US industry has been in recession, which is reflected in the 11 consecutive months of negative year-over-year industrial production through July 2016.”

He says the August Institute for Supply Management data confirms US industrial and manufacturing weakness and adds that it “also confirms our expectations of a coming recession”.

 The prospect of an informal production freeze by OPEC and key non-OPEC members is fading and confusion abounds.

Energy ministers from around the world will gather in Algeria for the International Energy Forum’s meeting at the end of September.

The market has been building momentum in recent weeks hoping for an agreement, but the Russian energy minister, Alexander Novak has now said there’s no need to collectively take any action.  

Saudi Arabia’s minister of foreign affairs, Adel Al Jubeir said if other members were to agree a freeze then his country would welcome a “common position towards a common effort”.

As we head towards the final quarter of the year, inventories will be drawn down and many analysts question the need for the market to be proactive.

Depending on who you listen to, the oil price could head in any direction. Such divergent opinions are rare in the market as analysts often seem to follow a trend.

Commerzbank says the market is experiencing a “return to reality” and is looking at the prospect of US$40 a barrel.

Barclays is being a bit more optimistic with a forecast for the final quarter of up to US$52 a barrel.  

Energy expert and vice chairman of IHS Markit, Daniel Yergin, reminded us this week that “downturns are not permanent” and he said he believed the worst is over for this cycle.

He said he foresees a return to the mid US$50 range and told Bloomberg that prices are in a “recovery phase and a re-balancing phase”.

The rebalance the market so desperately needs will depend on a number of factors; continued oil demand being one of them.

In the longer term, the lack of investment in the sector in recent years should tighten the market and hopefully give the oil price a much needed boost towards the end of the year.

 


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