OIL

In the New York market oil’s stunning price collapse is undoubtedly one of 2014’s top stories and will remain a major theme for investors in 2015. Indeed, oil futures CLF5,-1.35pc have plunged 39pc from the beginning of the year, including carnage in December 11 trading that saw oil settle below $60, at $59.95, marking its lowest settlement price since July 14, 2009, while Brent LCOF5,-0.63pc is down about 42pc for the year.

Brent and West Texas Intermediate traded near the lowest price since July 2009 as Saudi Arabia questioned the need to cut output, bolstering speculation that Opec’s biggest producer will defend market share. Global demand for crude from the Opec will drop next year by about 300,000 a day to 28.9m barrels, the least since 2003, the group predicted last week.

Oil’s collapse into a bear market has been exacerbated as Opec’s three largest members offered the deepest discounts on exports to Asia in at least six years. The group, which supplies about 40pc of the world’s crude, decided against reducing its output quota at a meeting last month even as the US pumps at the fastest pace in more than three decades. Brent for January slid $2.60 to $64.24 on December 10, the lowest settlement since July 2009. The European benchmark crude traded at a premium of $3.65 to WTI. Prices are down 42pc in 2014.

Oil resumed its downward move on December 10, falling towards $64 a barrel and within sight of a five-year low, pressured by signs that already ample supply will be even more plentiful in 2015. Crude prices sank on December 10, as Opec forecast an increasing supply surplus in 2015. US crude inventories unexpectedly rose and Opec’s most influential voice, Saudi Arabia’s oil minister, shrugged off the need for an output cut. Brent has fallen more than 40pc, or $50, from its 2014 high reached in June and others in the market say the losing streak could have further to run.

Opec said on December 8 demand for its crude in 2015 would fall to its lowest in more than a decade, indicating a large supply surplus in 2015 without Opec output cuts or a slowdown in the US shale boom. The prospect of any Opec cut remained slim as the Saudi oil minister, questioned the need for one, sticking to his stance outlined at Opec’s meeting on November 27 despite a $13 drop in prices since then. Saudi Arabia the main member of the Opec, has maintained its output, producing between 9.6m and 9.7m barrels per day in November.

Other Opec members are divided on how to respond to the global surplus and falling prices. Algeria and Venezuela have hinted at an Opec emergency meeting before the group’s scheduled session in June, to discuss action for boosting prices. Brent LCOc1 settled down $2.60, or 3.9pc, at $64.24 a barrel after plumbing $63.56, its lowest since July 2009.

US crude stocks rose unexpectedly a fortnight back and high refinery activity caused a surge in inventories of refined oil products, data from the Energy Information Administration showed. Gasoline stocks, particularly, rose by 8.2m barrels, way above the 2.6m.

The market also came under pressure following Opec’s monthly report, which revised down demand for the group’s oil next year to 28.92m bpd, down 300,000 bpd from its previous expectation. The group’s three largest members, Saudi Arabia, Iraq and Kuwait, are offering oil to Asian buyers at the deepest discounts in at least 6 years. Kuwait Petroleum Corp., the state-run oil company, will sell its crude to Asian refiners at $3.95 a barrel below regional benchmarks next month, the company said. That is the biggest discount since December 2008. Iraq’s discount in Asia is the biggest in at least 11 years and Saudi Arabia widened the discount on Arab Light to the most in at least 14 years.

The fall in oil prices on December 9, which has pummeled energy stocks in recent weeks, dragged down the broader stock market. On December 10, stock futures remained in positive territory even as oil prices turned negative after trading higher for much of the overnight session. Dropping oil prices have been a boon to the US economy, as drivers are spending substantially less on gasoline in the midst of the holiday-shopping season. But lower prices hurt oil-producing nations and companies that drill for oil and threaten the viability of expensive drilling projects, especially in US shale-oil fields.

Opec’s proceeds from oil exports will no doubt be affected, but the group will still rake in revenues of $760-billion this year alone, to add to the trillions of dollars already parked in sovereign wealth funds and global assets, and giving it the fiscal cushion to ride out the oil decline.

GOLD

In the London market, gold fell nearly 1pc on December 11, retreating further from the previous session’s seven-week high as the dollar extended gains after US data pointed to a strengthening economy. Spot gold was down 0.7pc to $1,217.93 an ounce. The metal rose to a seven-week high of $1,238.20 a day earlier, before giving up gains on steadier equity markets. Gold was still on track for a 2.6pc weekly gain so far, the biggest since mid-October, as it benefited from a pullback in the dollar over the past few sessions. US gold futures were down 0.9pc at $1,218.70 an ounce. The dollar was up 0.4pc against a basket of currencies and was expected to firm further ahead of the US Federal Reserve’s policy meeting, which could give cues on the timing of the central bank’s interest rates hikes.

Weakness in energy prices has weighed on gold sentiment lately, dulling the metal’s appeal as a hedge against oil-led inflation. Safe-haven demand and short covering have been behind gold’s recovery from 4-1/2-year lows hit last month. An improvement in sentiment was seen in the holdings of SPDR Gold Trust, the world’s largest gold-backed exchange-traded fund. The fund saw inflows of nearly 3 tonnes on December10, bringing total holdings to 724.80 tonnes. Despite those inflows, holdings are still firmly near six-year lows.

Published in Dawn, Economic & Business, December 15th , 2014