Oil heads back to $30/bbl and probably lower

Oil markets

SHARE THIS STORY

Brent Jul16b

There was never any fundamental reason why oil prices should have doubled between January and June this year. There were no physical shortages of product, or long-term outages at key producers. But of course, there was never any fundamental reason for prices to treble between 2009 – 2011 in the Stimulus rally, or to jump nearly 50% between January – May last year.

 Instead, prices once again rose because financial players expected the US$ to decline
 They realised this meant they could make money by buying oil on the futures market as a “store of value”
 Now, as the US$ has started to recover, they are selling off these positions
 And so oil prices are falling again

The problem is that the financial volumes swamp the physical market – they were 7x physical volume at their 2011 peak- and so they destroy the oil market’s key role of price discovery based on the fundamentals of supply/demand. As I worried in an interview back in March:

“Now the central banks are doing it again. And so, once again, oil prices have jumped 50% in a matter of weeks, along with prices for other major commodities such as iron ore and copper, as well as Emerging Market equities and bonds. In turn, this will force companies to buy raw materials at today’s unrealistically high prices, as the seasonally strong Q2 period is just around the corner. Some may even build inventory, fearing higher prices by the summer.

If this happens, and prices collapse again as the hedge funds take their profits, companies will … be sitting on high prices in a falling market in Q3 – just as happened in January. Only Q3 could be worse, being seasonally weak, and so it may take a long time to work off high-priced inventory.”

Today, just as I feared, the hedge funds are indeed now unwinding their bets and leaving chaos behind them. As Reuters reports, they have already “slashed positive bets on US crude oil to a 4-month low”:

Russia has confirmed the myth of an OPEC/Russia oil production freeze is now officially dead
US oil and product inventories hit an all-time high of almost 1.39bn barrels
China’s gasoline exports have doubled over the past year, and its diesel exports tripled in H1
Saudi Arabia’s Oil Minister has warnedThere are still excess stocks on the market – hundreds of millions of barrels of surplus oil. It will take a long time to reduce this inventory overhang

Even worse is that the world is now running out of places to store all this unwanted product, as Reuters reported earlier this month:

Storage tanks for diesel and heating oil are already so full in Germany, Europe’s largest diesel consumer, that barges looking to discharge their oil product cargoes along the Rhine are being delayed”.

Similarly, the International Energy Agency has reported a major backup of gasoline tankers at New York harbor, due to storage being full, whilst Reuters added that tankers are being diverted to Florida and the US Gulf Coast to discharge.

Plus, of course, the recent rally has proved a lifeline for hard-pressed oil producers, who have been able to hedge their output at $50/bbl into 2017. As a result, companies have started to increase their drilling activity again, and are expected to open up many of the 4000 “untapped wells” – where the well has been drilled, but was waiting for higher prices before it was sold.

Yet wishful thinking still dominates oil price forecasts. $50/bbl has always been the “Comfortable Middle” scenario, as we noted in the Demand Study – and most companies and analysts are most reluctant to break away from this cosy consensus. Yet even in February this year, only 3.5% of global oil production was cash-negative at $35/bbl – just 3.4mbd. Today’s figure is likely even lower, as costs continue to tumble.

And in the real world, oil prices have already fallen more than 10% from their $50/bbl peak. Unless the US$ starts to fall sharply again, it seems highly likely that prices will now revisit the $30/bbl level seen earlier this year. Given the immense supply glut that has now developed, logic would suggest they will need to go much lower before the currently supply overhang starts to rebalance.

WEEKLY MARKET ROUND-UP
My weekly round-up of Benchmark prices since the Great Unwinding began is below, with ICIS pricing comments:
Brent crude oil, down 56%
Naphtha Europe, down 57%. “Market fundamentals weak. US gasoline blending demand poor,”
Benzene Europe, down 51%. “Spot prices moving higher over the course of the week alongside some upward movement in the US market.”
PTA China, down 40%. “Major producers are understood to still be in discussions with provincial authorities on a confirmed stoppage timeline for their PTA lines during the G20 periods.”
HDPE US export, down 33%. “China’s current import prices are higher than domestic prices.”
S&P 500 stock market index, up 11%
US$ Index, up 20%

PREVIOUS POST

Force majeures at all-time highs even before downturn begins

22/07/2016

There is no such thing as an accident.  The chemical industry, like others, has...

Learn more
NEXT POST

Wrong assumptions on China growth and oil prices mean danger lies ahead for refiners and polymer producers

27/07/2016

It could be a very difficult H2 for anyone involved in the Asian oil and polymer...

Learn more
More posts
Oil prices start to reconnect with coal and gas
21/06/2020

Oil prices are finally starting to reconnect with other fossil fuel prices, as the chart shows.  It...

Read
Oil markets hit perfect storm as coronavirus cuts demand
01/03/2020

Former Saudi Oil Minister Sheikh Yamani’s warning in 2000 looks increasingly prophetic today: ...

Read
Oil markets hold their ‘flag shape’ for the moment, as recession risks mount
17/11/2019

Oil markets can’t quite make up their mind as to what they want to do, as the chart confirms. ...

Read
Oil market weakness suggests recession now more likely than Middle East war
11/08/2019

Oil markets remain poised between fear of recession and fear of a US attack on Iran. But gradually i...

Read
Recession risk rises as Iran tensions and US-China trade war build
26/05/2019

Oil markets are once again uneasily balanced between two completely different outcomes – and o...

Read
Déjà vu all over again for oil markets as recession risks rise
03/03/2019

Back in 2015, veteran Saudi Oil Minister Ali  Naimi was very clear about Saudi’s need to adop...

Read
Oil prices flag recession risk as Iranian geopolitical tensions rise
20/05/2018

Today, we have “lies, fake news and statistics” rather than the old phrase “lies, ...

Read
Saudi oil policy risks creating perfect storm for Aramco flotation
15/04/2018

Good business strategies generally create good investments over the longer term. And so Aramco need...

Read

Market Intelligence

ICIS provides market intelligence that help businesses in the energy, petrochemical and fertilizer industries.

Learn more

Analytics

Across the globe, ICIS consultants provide detailed analysis and forecasting for the petrochemical, energy and fertilizer markets.

Learn more

Specialist Services

Find out more about how our specialist consulting services, events, conferences and training courses can help your teams.

Learn more

ICIS Insight

From our news service to our thought-leadership content, ICIS experts bring you the latest news and insight, when you need it.

Learn more