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Oil relegated to junk status

Published Monday, January 4th, 2016

This is the time of the year to look back on old fundamental reports to see what the oil world looked like a year ago. In fact it looked remarkably like it does today. Our first 2015 report on Monday January 5 was headlined ‘2014, the year oil lost its swagger’ and contained the following comments from the Saudi oil minister given in an interview with the Middle East Economic Survey and at an oil conference in Dubai:-

— “it is not in the interest of OPEC producers to cut their production whatever the price is”.

— “the best thing for everybody is to let the most efficient producers produce”.

We were warned and our view a year ago, hardly ground-breaking, was that the responsibility for Brent losing $53.47 bbl and WTI $45.15 bbl in 2014 could not be laid at the door of speculators but was purely and simply down to “the fundamentals of supply and demand and the sudden removal of the artifice of OPEC price support” leading us to the conclusion for 2015 that “the fundamentals are clear, showing all the classic signs of oversupply with price curves in contango and forecasts showing a surplus of between 1.5 and 2 mbpd of oil”. As if this was not enough oil had to labour for most of last year under the burden of a strengthening dollar.

The absolute price fall in 2015 may not have been as much as in 2014 but it has been equally if not more dramatic in terms of the level to which it has fallen and the consequences. Brent lost $20.05 bbl in 2015 closing the year at $37.28 bbl. WTI lost $16.23 bbl for a close of $37.04 bbl. If 2014 was the year oil lost its swagger, then 2015 is the year oil was relegated to junk status as an asset class.

to read the rest of the report, please click here

Posted by David Hufton