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BR Research

Oil gloom deepens

Oil has hit a 10-month low. The year-to-date decline has extended beyond 20 percent - the worst performance in over
Published June 23, 2017

Oil has hit a 10-month low. The year-to-date decline has extended beyond 20 percent - the worst performance in over 20 years. Oil is now effectively a bear market, and that has happened after quite some time. All this, right after the extension of Opec deal, the ink of which has not even dried yet, but investors appear to be in a frenzy, and reasons are aplenty.

First and foremost, is the ever increasing US oil production, which has shown no signs of receding even at current levels. The US active oil rig count has increased for 22 weeks in a row, which is a new record, and the Opec members are effectively forfeiting their share to the US producers. This instils fear amongst investors, as it raises the possibility of smaller Opec members cheating on the agreed production limit.

Even if Opec stays true to its word, which it has up until now, there is ample reason to be worried. The likes of Libya, Nigeria and Iraq are fast approaching record high production. Recall that these countries are not part of the Opec production freeze deal. The global stockpile has proved to be stubborn, and has continued to rise week after week. Global demand has not picked up as earlier anticipated either.

The evidence of robust compliance by Opec and even non-Opec members has not been bought well by investors. Worse still, the appointment of new Saudi crown prince has been viewed as a net negative event for oil prices. It appears less likely that the new crown prince will tinker with the oil policy anytime soon, but his rigid views on foreign policy, could well bring the geopolitical risk premium back to the table. In the absence of any visible bull triggers, this alone could be enough to send oil prices packing to new lows.

"The biggest headwind for the market remains the steady trend of rising U.S. oil output as it is offsetting the efforts of global production-cut agreement, and at the same time damaging morale among [the Organization of the Petroleum Exporting Countries] producers who are actively forfeiting market share to the U.S.," reads a report from a leading US commodity research house.

Market analysts have tipped the next few weeks very critical for the price direction, banking heavily on the US stockpile. There is near consensus that if the inventories do not fall sharply, and soon, oil in $30s a barrel does not seem too far off.

Copyright Business Recorder, 2017
 

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