Drowning in oil

Quote of the Day

Tough times never last, but tough people do.

Robert H. Schuller

The oil complex remains under pressure as the market continues to digest the return of additional Iranian oil into a market that is already engulfed in a global surplus. The expiring (today) spot Feb Nymex WTI contract is now trading at levels not seen since April of 2003. The combination of the announcement of the release of sanctions over the weekend along with another bearish oil forecast coming from the IEA yesterday morning kept the bottom pickers on the sidelines as new sellers seemingly entered the mix. Further adding to the bearish sentiment in the oil and the broader commodity complex is the continuing sell-off in the global equity markets (see below for more details).

As I have discussed many times in the newsletter the oil complex remains in a long term downtrend and will remain in this trading pattern until there are clear signs that supply is being curtailed and the global oil market is in a sustained rebalancing pattern. Over the longer term low oil prices will eventually result in global supply and demand coming back into balance. That is not likely to happen until 2017 the earliest as recently forecast by both the EIA and IEA. In the short term a change in OPEC’s market share strategy back to supporting prices by cutting production would certainly stop the bleeding of the oil price.

Over the last several weeks there have been talks by a few OPEC members trying to put together an emergency OPEC meeting sometime in March. First the Nigerian oil minister talked it up last week and today Reuters is reporting the Algerian oil minister suggesting that talks are on to hold an emergency OPEC meeting. Talks of an emergency OPEC meeting have been floated in the market many times since the downtrend began in 2014. However, Saudi Arabia has said the only way they would cut production is if non-OPEC producers … in particular Russia also cut production. Since this seems to be a strong condition it does not look like any cuts by OPEC alone will take place anytime soon. The market is mostly ignoring the Algerian minister’s comments so far this morning as prices continues to drift lower.

Barring a surprise announcement by OPEC prices are likely to continue to move lower until a level is found that will accelerate the rebalancing of the global oil complex. In the short term the market will remain focused on what evolves around Iran. How much oil will they actually add to the market and how much of a discount will they have to offer (versus current low prices) to convince buyers to take on their oil? Important questions that will eventually have an impact on price direction.

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