Oil markets have weakened significantly since they fell out of their major 'triangle' formation earlier this month. WTI is already within the forecast $60-80/bbl range although, as the chart shows, Brent still maintains a $10/bbl premium at $90/bbl.
Of course, charts can only display the change in sentiment and direction. They cannot explain why it is happening. Usually, this only becomes clear after the change has begun to take place.
A key factor this time may be Iran:
• The West is determined to stop Iran's nuclear development, and has put in place a comprehensive oil and sanctions policy to achieve this
• This means traders know strategic stockpiles will be used to balance markets if required, and so relieves price pressure on the upside
• The Saudis blame Iran for the unrest in the oil-rich Eastern Province and for October's alleged attempt to assassinate their US ambassador
• They are pumping near-record volumes at 10mbd, which has led to speculation they may be aiming to pressure Iran by reducing oil prices
The latter argument is covered in more detail in an interesting Foreign Policy article kindly forwarded by a blog reader in the Middle East.
Today's weaker market means we are now suffering the reverse of Q1's panic-buying when crude prices were rising. Buyers are instead trying to reduce inventory to avoid being caught in a falling market.
This is also making life difficult for CFOs, due to the working capital risk. And they worry this may take some time to reduce, as we reach the seasonally slow Q3 holiday period.
The critical question is where oil prices go next:
• Some still believe that a commodities supercycle is underway, which will take prices back to $120/bbl en route to their $200/bbl target
• But the consensus now sees prices keeping closer to today's levels, which also fulfil the budget needs of leading OPEC producers
• However, if the geo-politics argument is correct, Saudi might well be prepared to take prices much lower, to really pressure Iran
Lower prices would certainly help the global economy, and would kick-start consumer spending again, as in the past.
But the recent record period of high oil prices has already pushed the economy into near-recession. And if prices were to fall below $60/bbl, this would then cause major cash-flow issues for many companies.