By Ole S. Hansen
(Head of Commodity Strategy, Saxo Bank)
The ongoing fall in global oil prices is still setting the agenda for commodities. During the past week the Bloomberg Commodity Index reached a new five-and-a-half-year low as selling in the oil sector continued. Since the Opec meeting on November 27 when the cartel decided to keep prices unchanged, the prices of WTI and Brent crude oil, the two global benchmarks, have now lost close to 20 percent in value.
Precious metals bucked the negative trend for a second week with silver especially coming back from the brink. This both in terms of absolute performance but also relative to gold where it reached a six week high. The recent rally in both metals can at this stage mostly be considered being a reaction to the profit taking currently hitting the dollar but also the weakness seen in stock markets during the past week has lent support. Overall, the question remains whether these current drivers are considered to be strong enough at this stage to trigger a change in direction.
While the combination of a weaker dollar and stock market have been supporting precious metals the energy sector have not found much to cheer about with WTI crude oil loosing by double digits for a second week running. Rising production and subsequent rising inventories in the US may begin to trigger a rise in inventories at the delivery hub for WTI crude oil at Cushing, Oklahoma. If that happens we could see the discount to Brent crude widen and the oil curve move deeper into contango over the coming months.
The race to the bottom in crude oil therefore continues and the only consolation for hard pressed producers which are seeing revenues tumbling at the moment is that the bigger and faster the fall the sooner we could potentially see a normalisation and price recovery.
Strains are emerging all over the place with the Russian ruble remaining under sustained selling pressure while in the US the yield on junk rated energy bonds are approaching distressed levels close to 10 percent above the current treasury yield. Current oil prices are too low for 10 out of OPEC’s 12 members to balance their budgets according to data collected by Bloomberg.
What added additional ammunition to sellers this past week were downgrades to demand growth from both Opec and the International Energy Agency. Both saw the demand for OPEC oil fall to around 28.9 million barrels per day. This is more than one million barrels below the production target of 30 million barrels per day which the cartel left unchanged during its November meeting.
Despite the latest sharp fall in oil so far none of the two organisations are seeing any sizable reduction in US shale oil production as a result the latest sharp fall in prices. This will obviously be a concern to many oil producers as supply destruction at a time of slowing demand growth is the only available cure right now.
Trying to call a bottom in this current environment where fear has become a significant driver is not easy. What is clear is that the strong negative momentum can only be broken if we start to see signs of supply destruction. Hedge funds reduced shorts and added to long positions before the latest ten percent sell-off as they tried to preempt a turnaround. As the sell-off continued the unwinding of these will have caused a considerable amount of additional selling during the past week, not least considering the deterioration of the fundamental outlook.
We continue to look for signs of a slowdown but we should probably not expect any sizable reduction for several months, thereby leaving prices vulnerable to further weakness into the first quarter. Shale oil from Bakken in North Dakota is now trading below USD 55/bbl at the well while West Canadian Select which derives from oil sand is trading close to USD 40/bbl. Such a sharp deterioration will undoubtedly lead to supply reductions sooner rather than later but for now the market has to deal with a very strong negative price momentum which could driver the price down even further.
The Peninsula
