Oil heads to $30/bbl as Great Unwinding reaches 1st anniversary

Oil markets


Global markets are becoming ever more complex as the Great Unwinding of stimulus policies continues.  This means that each blog post is now taking much longer to write.  It therefore seems sensible to focus on writing 3 posts each week – on Monday, Wednesday and Friday – in order to continue to provide the highest possible quality of analysis. 

GU 15Aug15
It is exactly a year since I forecast that the Great Unwinding of stimulus policies was about to begin:

  • Brent oil prices were then at $104/bbl and had been above $100/bbl level for over 3 years
  • The US$ index against the world’s major currencies was at 81, continuing its 30-year downtrend since 1985

Last Friday, as the chart shows, Brent oil prices were 54% lower at $49/bbl, and the US$ Index was 19% higher at 96.

These are massive moves over such a short space of time.  Most worryingly, it seems that most commentators never even dreamt that they could take place.  Thus it is only very recently that the consensus has begun to accept that oil prices might stay “lower for longer”.  Even China’s devaluation last week appeared to come as a complete shock to most experts.  This highlights the problems caused by policymakers’ refusal to accept that demographic change is creating a New Normal world.

Global debt has risen by $57tn since 2007 to $199tn, as they tried to restore growth to the SuperCycle levels seen when the BabyBoomers were in their peak income and spending period.  In the process, they destroyed the price discovery mechanism in most major financial markets.  In turn, of course, this means that most people under the age of 40 have never known a world where markets fulfilled their fundamental role of balancing supply and demand.

Over the past year, however, markets have begun to rediscover their role.  Oil prices have therefore been falling, and the US$ has been rising.   And this process will likely continue.  As the International Energy Agency reported last week, “global supply continues to grow at a breakneck pace“.  As a result, it suggests that “2H15 sees supply exceeding demand by 1.4 mb/d, testing storage limits worldwide”.

US markets are already waking up to reality, with storage tanks at the key Cushing terminal expected to overflow within 2 months.  And already the force majeure at BP’s Whiting refinery has caused Western Canada Select crude to trade at just $22.75/bbl on Friday.  Brent prices are also weakening, of course, as Iraq production hits record levels and Iran prepares to return to the market – at a time when Chinese and Asian demand is slowing fast.

I therefore doubt that it will be too long before Brent prices hit my forecast level of $30/bbl.  And they will quite possibly go much lower, due to the long-term surpluses that have now developed in all major energy sources – coal, gas and oil.  This will create great opportunities for those who are light on their feet.  But it will also create major challenges for those who cling to the idea that policymakers and the consensus know best.

My weekly round-up of Benchmark prices since the Great Unwinding began is below, with ICIS pricing comments: 
Brent crude oil, down 52%
Naphtha Europe, down 51%. “Asian arbitrage window closed because of high freight rates”
Benzene Europe, down 48%. “Supply is expected to lengthen into September, with improved cracker operating rates and lower downstream production”
PTA China, down 41%. “The traditional pick-up in demand between August and September had also not been seen so far”
HDPE US export, down 27%. “Domestic export prices dropped during the week as suppliers and producers lowered prices to keep their ties open to international markets.”
¥:$, down 21%
S&P 500 stock market index, up 7%


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