Oil prices to stay low amid high stockpile

Oil prices to stay low amid high stockpile

August 05, 2015
Oil prices to stay low amid high stockpile
Oil prices to stay low amid high stockpile

Syed Rashid Husain

Faced with major headwinds, crude oil markets last week registered their biggest weekly decline since March.

The ongoing Greek financial soap opera, prospect of a deal between Iran and the west, resilient production from US shale, increasing output from OPEC, the cooling down of the Chinese dragon and high inventory levels both in the US and Europe - all appear weighing heavily on crude markets.

The heat is on. "There's not too much conviction in the market in terms of where we're going, and you have big support to the downside and big resistance to the upside," Citigroup energy strategist Chris Main was quoted as saying by CNBC.

Despite the fact that it is neither a major oil consumer nor a significant producer, the financial turmoil in Greece is a major drag on crude markets, impacting both supply and demand fundamentals. It is dragging down global equity and commodity markets, spooking investors fearing a broader contagion.

The crisis could hit the value of the euro, making the US dollar attractive, both as a safe haven and as an investment vehicle. If the dollar appreciates, that will push down oil – since oil is priced in dollars.

With the US dollar holding firm, oil prices would remain pressured, Daniel Ang, the investment analyst with Phillip Futures in Singapore, was quoted as saying by AFP.

Already signs of weakness were evident early last week, as the crisis in Athens unfolded. Crude begin tracking losses in global equity markets last Monday after Greek Prime Minister Alexis Tsipras opted to break the bailout reform talks, calling for a referendum on austerity conditions demanded by its creditors.

Iran nuclear talks is also under spotlight. Markets are awaiting, rather impatiently, to see if Iran and major world powers can reach a deal on Tehran's nuclear program. An agreement could put 1 million barrels of Iranian crude back on the market eventually.

Should negotiators reach a deal for Iran to end its nuclear program, in addition to the increase in production, Iran could also unleash an estimated 30 million to 40 million barrels of oil it now stores on tankers, reports underline. "It's a substantial amount of oil.

It could potentially move the market out of the current range," Patti Domm quoted Michael Cohen, head of energy commodities research at Barclays, as saying. "This may be the time when we break lower and into the $50s," Bjarne Schieldrop, head of commodity analysis at SEB in Oslo emphasized.

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Again Capital analyst John Kilduff told CNBC if talks actually fell apart altogether, the price of oil could immediately jump $10 a barrel. "The knee-jerk is going to be higher (prices).

Also, I would assume relations will deteriorate between the US and Iran, and maybe others, and that will raise the security premium for potential military action that Israel will push for," he added.

And in the meantime, the share battle, between the OPEC and non-OPEC producers' continues unabated. A rebound in US drilling last week, after a 29 weeks siesta, added to signs that shale producers will keep pumping into an oversupplied market. The US output already last week touched the 40-year high of 9.6 million bpd.

OPEC oil supply was also at a three-year high, close to 2.5 million bpd above the call on its crude, a Reuters survey showed. The Saudi production has also been on rise, touching the 10.3 million bpd in May as compared to 9.69 million bpd a year earlier. All this is contributing to the market glut.

In the meantime, China's crude appetite is slowing. China’s economic growth has been cooling in recent years, with 2014 marking its slowest GDP growth rate in a quarter century- impacting the Chinese crude demand patterns too.

In the meantime, the Chinese stock market is increasingly looking like a bubble ready to pop. The Shanghai Composite, an index of all stocks traded on the Shanghai Stock Exchange, that had spiked by 40 percent so far this year and has doubled from mid-2014, and the Shenzhen Composite surged by a jaw dropping 90 percent since the beginning of 2015.

But both are on now on retreat, Nick Cunningham reported. China’s Shanghai Composite has plummeted in recent weeks, falling around 25 percent. Since June 12, Shanghai and Shenzhen have seen $2 trillion dip in market capitalization.

Dangers from China’s volatile stock market come on top of some warning signs about its energy demand too. A new report from the Australian government raises concerns over China’s tepid demand for LNG, of which Australia is one of the world’s top producers.

China’s LNG consumption was expected to grow by more than 50 percent between 2014 and 2016, but “downside risks appear to be growing,” the report finds. For the first time since 2006, China imported less LNG in the first quarter of 2015 compared to the same quarter in the year prior.

China’s level of oil imports have been looking shaky even before the latest turmoil. Beijing's oil imports, that hit a record high in April, dropped by 11 percent in May from a year earlier.

Chinese oil demand growth has been leveling off in recent years and the elevation in its imports, experienced in recent months until April, could also be due to the decision to stockpile oil for its strategic reserve - while the prices were lower. Once that gets stopped, its imports had to abate.

"In May, we saw a drop in crude imports. Part of the reason people suggested that was because they were doing less strategic stock building," Main added.

Elevated crude inventory levels are also adding to the pressure on crude markets. When the glut like scenario sent crude prices plunging to near-six-year lows in the first quarter of the year, refiners started stocking up.

As more and more oil entered storage, pushing US inventories to the highest level in more than 80 years, it prompted some to stash oil on ships in the ocean.

Inventories in Europe and South Korea are also reported to be very high. All these stashed barrels are now available with the refiners - adding to the growing pressure on the already soft crude markets. Markets are in for some rough ride!


August 05, 2015
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