The post-OPEC agreement honeymoon period for oil seems to be over as the price of crude futures retreats below $50. Last week was one of the worst weeks for oil since November with a 9.1 percent decline with crude settling at $48.49.
The main trigger for the sharp decline last week was the US crude oil inventories report released by the energy department. The market was expecting an increase of 1.5 million barrels in inventory while the actual figure came out at 8.2 million barrels. Preceding the data release, the net-long speculative positions in oil were also at their peaks. As traders got surprised by the data, a major sell-off was initiated.
The inventory build-up in the US which has now risen to historic levels is a major concern for OPEC and negates the argument of shale being not profitable at lower levels. With advancement in technology and focus on efficiency, the shale producers have now taken their break-even prices much lower to what was anticipated by the cartel. For example, breakeven oil price for Bakken shale in US was $98 in 2013 and currently it is $39. That is a decline of more than 50 percent and the same pattern can be seen with other major shale plays.
On the other hand, OPEC has lost its teeth with only Saudi Arabia fully adhering to the output cuts and even covering for other members. Currently OPEC has been able to achieve 70 percent of its 1.2 million barrels a day output-cut target agreed by the members at the end of last year. This percentage would have been severely low had the Saudis not gone 57 percent above their pledged cuts.
With Iran, Iraq and Libya stepping up production which was agreed previously, the case for higher oil prices looks bleak and retest of $40-45 cannot be ruled out.
On the local bourse here at the Pakistan Stock Exchange, oil stocks also took a hit as crude breached $50. Stocks like OGDC, PPL, POL, MARI and PSO saw extensive selling during the week. With the benchmark KSE-100 index being heavily loaded towards oil, these stocks were also the major index laggers of the week.
However, low oil prices will come as another timely relief for the government. The external account has been under pressure lately with exports falling and imports increasing. Ideally, the government should hold onto the current domestic petrol and diesel prices but in the midst of a heated political situation, a cut in petrol prices cannot be ruled out.
Comments
Comments are closed.