World commodities

Published December 29, 2014

OIL

GLOBAL oil markets fell again on December 24, in holiday-thin trade, extending more than a week of see-saw volatility as traders jousted over whether a growing supply glut had been fully priced in. Oil was lower early in the day and tested new lows after US data showed crude inventories unexpectedly rose by 7.3m barrels last week to their highest December level on record. US crude’s front-month contract fell $1.28 to settle at $55.84/barrel, when the New York Mercantile Exchange shut early for the Christmas holiday. Around 180,000 contracts were traded, about half the recent norm.

Front-month Brent fell $1.45-60.24/barrel after a session low of $59.37. Brent has fluctuated wildly on either side of $60/barrel for the past seven days, but has yet to break definitively below that psychological level.

Oil prices this year have collapsed to their lowest since the financial crisis. Weak demand and growth in US shale output has created a global supply glut that OPEC kingpin Saudi Arabia has said it will not erase by cutting its own output.

The US Energy Information Administration (EIA) has released its weekly petroleum status report. US commercial crude inventories increased by 7.3m barrels last week, maintaining a total US commercial crude inventory of 387.2m barrels. Crude inventories remain well above the upper limit of the five-year range for this time of the year.

Total gasoline inventories increased by 4.1m barrels last week and remain well above the upper limit of the five-year average range. Total motor gasoline supplied (the EIA’s measure of consumption) averaged over 9.2mbpd for the past four weeks, up by 4.1pc compared with the same period a year ago.

Distillate inventories increased by 2.3m barrels last week and remain in the lower half of the average range. Distillate product supplied averaged about 3.9mbpd over the past four weeks, up by 3.1pc when compared with the same period last year. Distillate production averaged over 5.2mbpd last week, roughly flat with the prior week’s production.

Saudi Arabia, the world’s largest crude exporter, on December 25, announced a 2015 budget with a huge $38.6bn deficit due to the sharp decline in oil prices but still raised spending. Spending for 2015 is projected at 860bn riyals ($229.3bn) and revenues at 715bn riyals ($190.7bn).

Projected spending is slightly higher than the 855bn riyals planned for this year, but revenues are 140bn riyals lower than estimates for 2014. The budget shortfall is the first deficit projected by the Opec kingpin since 2011 and the largest ever for the kingdom. Over the past decade, Saudi Arabia overspent budget projections by more than 20pc and if the trend is maintained next year, the deficit will be much higher.

The price of oil, which makes up more than 90pc of public income in Saudi Arabia, has lost about half of its value since June due to a production glut, weak global demand and a stronger US dollar. If oil prices remain at the current level of about $60/barrel for benchmark Brent crude, Saudi Arabia is expected to lose half of its oil revenues of $276bn posted in 2013.

But the wealthy kingdom, which pumps around 9.6mbpd, can easily tap into huge fiscal buffers, estimated at $750bn, to meet the budget deficit. The King has authorised the finance minister to draw ‘from the reserves’ to meet the deficit or through borrowing.

Saudi authorities pledged to curb wages and push ahead with investments next year as the world’s largest oil exporter seeks to counter the effect of tumbling crude prices on the economy. The Finance Ministry said the government will continue to invest in areas such as education and health care, while exerting ‘more efforts’ to curb spending on wages and allowances, which make up about 50pc of spending. Projected revenue will drop more than 30pc next year to 715bn riyals, while expenditure was set at 860bn riyals, budget data show. Spending in 2014 is estimated to have been 1.1trn riyals, 29pc higher than target.

Oil’s international benchmark price dropped as much as 49pc in 2014. Those looking for a quick rebound may be disappointed, as world consumption growth slowed to the least since 2009, US companies pumped more than they have since the 1980s and a price war broke out among members of the Opec.

GOLD

IN the New York market, gold fell near a three-week low on December 24, as the latest piece of strong US economic data fed the view that the Federal Reserve may bring forward the timing of a hike in US interest rates. US Labour Department data showed initial claims for state unemployment benefits dropped for the fourth straight week. A day earlier, the Commerce Department said the US economy grew in the third quarter at its quickest pace in 11 years.

Spot gold, initially supported by a softer dollar, gave up gains after the US data to trade down 0.1pc to $1,173.66/ounce, within reach of a three-week low of $1,170.17 hit on December 22. Any dip below that level could trigger further losses. US gold futures for delivery in February fell 0.4pc to settle at $1,173.50/ounce in a shortened Christmas Eve session. European equities ended slightly higher in a shortened session ahead of the Christmas break, while US shares also edged higher. Stronger equities reduce demand for bullion, often seen as an alternative to riskier assets.

Holdings of the world’s top gold-backed exchange traded fund, SPDR Gold Trust, are near six-year lows, reflecting weak investment sentiment towards bullion.

Russia raised its gold reserves for the eighth month in a row in November, while Ukraine reduced its bullion holdings for a second straight month, according to IMF Fund data released last week. Russia, the world’s fifth-largest holder of bullion reserves, raised gold holdings by 18.753 tonnes to 1,187.493 tonnes last month.

Published in Dawn, Economic & Business, December 29th, 2014

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