Oil prices dropped to a 12-year low at 26.14. Yearly return is as low as -29%. As this price, not marketable at all, US stockpiles are more than 130mill barrel. Even with the impressive drop of 754k barrels last week it still persists above the five-year average. In the created contango lots of producers and traders are in search for temporary storages. The situation is that bad for some even supertankers are an option again disregarding costs. The silver lining flits for some, but is recovery realistic in the foreseeable future?
Major oil producing sites are affected massively as most producers in Canada are losing money on active wells. In the northern part of North America 50% of oil is extracted from oil sands, which is one of the most expensive approaches. Simultaneously major rigging projects in the Gulf of Mexico have been cancelled as deep sea oil extraction is bare costs at this market price. With this shift in the power, the reins are falling more tightly in hands of the market dominant Saudis. As interesting as it may seem there has been a hold for the couple last months in the oil market as there have been no announcements from the cartel-like OPEC, which seems to be sitting back and enjoying the pile of insolvencies issued by oil producers piling up. Anything Venezuelans or UAE or Nigeria say is disregarded as the wait for the call on market redistribution remains.
Meanwhile, portfolio managers around the world are not overly worried of the extremely low oil price. Just the opposite – they predict a very promising 50 USD per barrel exit for the crude oil this year. The reasons why fear cannot be sensed is that not much can be speculated in the short run on oil prices. In the long run, conversely, most managers see no other way for them to survive as the oil price to return at least at a double the price it is now. Some say that even a 15 USD per barrel low would not be lethal as long as the hope for the good-old highs endures.
On the technical side, introducing more speculation, market experts reassure that as a commodity, oil will undershoot on lows and overshoot on highs so, again, even lower plunge can be expected. Simultaneously, the executive officer of world’s largest independent oil trader Vitol Group argues whether the hope for oil price recovery really exists. Realistically considering all controversies, we arrive at the following down-to-earth conclusion.
Oil is in a very volatile stage nowadays. Commodity traders enter markets only for hedging of short-term speculation. No appreciation in oil price is predicted whilst Saudi Arabia keeps the price war under its control. The oil market is reorganizing, and the impact spills over on each economy involved. How hard had the oil price affected them we will only be able to say when we see a price recovery.
by Nils Vanags
Market Analyst at the Investment Fund