Technical & Fundamental Oil Reports Specialists

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No end in sight

Published Thursday, January 21st, 2016

As the great and the good of the finance world along with the odd Hollywood star gathered in Davos to discuss the various threats facing the world, the slump in risk assets intensified as markets continued in their struggle to shake off the January blues. Global equities were yet again at the mercy of oil prices which endured their latest nosedive and the resulting falls saw London’s FTSE 100 and Tokyo’s Nikkei 225 join several Chinese bourses in bear market territory. The same fate has yet to occur on Wall St, where shares ended the session down 1% having tumbled by as much as 3%, but it may only be a matter of time after the release of soft inflation and housing data fuelled concerns of a marked US economic slowdown.

Panic is setting in amongst some OPEC oil producers after Algeria called for a joint OPEC/non-OPEC output cut and Venezuela insisted on an emergency OPEC meeting in the face of ever falling oil prices. The fall, however, relentlessly continues with February WTI going off the board with a daily loss of $1.94/bbl and Brent losing 88 cents/bbl on the day. The API reported a bigger-than-expected crude oil stock build of 4.6 million bbls, hence the renewed weakness this morning. Expectations are for an increase of 2.8 million bbls. Distillate stocks are said to have grown slightly (+100,000 bbls) and gasoline inventories are estimated to have climbed 1.4 million bbls last week.

2016 a repeat of 1998?

The last time a down-trending oil market was at these kind of levels was back in 1998 when Brent slipped below $10/bbl before recovering significantly. Analysts, technicians as well as fundamentalists are now not excluding the possibility of a re-visit to that price level. Time will tell if this bearish view proves to be justified. In the meantime, it is a useful exercise to find similarities between the two periods and compare the current supply/demand balance with that of 1998, basis IEA data.

Firstly, both periods were oversupplied, in fact very oversupplied. The oil market experienced a global stock build of 1.3 mbpd in 1998 which is much the same as projected for this year, assuming Iran gradually adds up to 1 mbpd to production. On that basis a drop to $10/bbl is vindicated. It is especially true in the light of the fact that 1997 and 1996 also saw global oil stocks increase (700,000 bpd and 300,000 bpd respectively) just as in 2015 (+1.8 mbpd) and 2014 (+900,000 bpd). The similarities do not stop there. In the second half of the 1990s the downtrend started in 4Q1996 and the market bottomed out exactly two years later. The current price fall began in July 2014 so we are still within the “2-year time frame” and in the more subdued demand half of the year. As a matter of fact it is worth noting that no downtrend has lasted longer than 2 years since 1988.

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Posted by Stephen Brennock

Stephen Brennock joined PVM in 2013 after having worked as a project manager for a business development firm. He graduated with a degree in Business Management in 2007.