OIL

THE US crude oil slumped over 4pc on August 19 to hit a 6-1/2-year low and almost break below $40/barrel, as a huge unexpected stockpile build in the United States reinforced concerns about a growing global oil glut. The US crude inventories rose 2.6m barrels last week to 456.21m barrels, the government’s Energy Information Administration said.

Oil has more than halved in value over the last year, thanks to huge oversupply, and many oil companies, particularly in the US, say they may soon have to rein in production, tightening supply, unless the market recovers.

Oil prices have collapsed over the last year as Saudi Arabia and other members of the Opec have increased production to try to protect market share from competitors such as the US shale oil drillers.

The global crude oil benchmark, North Sea Brent, fell to almost $45/barrel in January from above $115 six months earlier. Prices then rallied but have since plunged towards lows not seen since the financial crisis and long recession that started in 2008-09.

The US oil production has risen by more than 4mbpd over the last five years, due to new shale extraction techniques such as ‘fracking’, eroding Opec’s sales.

And as prices have fallen, many oil producers have hedged their future oil production using derivatives, selling futures contracts for oil that will be pumped in 2016, 2017 and beyond.

This has helped pull down forward prices as nearby spot prices have collapsed, dragging the whole futures curve lower.

Output in Russia, the world’s biggest oil producer, has kept rising despite the price slump to reach a post-Soviet high this year. Russia depends heavily on oil, gas and metals exports for its budget revenues and a slump in commodities prices has pushed the country into recession and prompted it to devalue its rouble. Russian oil companies are holding up, however, as a stronger dollar lifts their revenues in rubles and their tax payments on exports have fallen as the price of oil has dropped.

Norway’s economic growth slowed in the second quarter as plunging crude prices sap investments and drive up unemployment in Western Europe’s biggest petroleum producer. Seasonally adjusted gross domestic product, excluding oil, gas and shipping, grew 0.2pc, after expanding a revised 0.3pc in the first quarter.

The slump in oil prices is proving painful for Norway’s economy, with almost half its exports related to petroleum. Crude producers and service companies such as state-controlled Statoil ASA have cut more than 20,000 jobs, sending ripples through an economy where one in nine jobs depends on oil.

Gold

GOLD hit its highest in nearly five weeks on August 20, after meeting minutes from the US Federal Reserve suggested policymakers were in no hurry to raise interest rates.

Although agreeing that the economy was nearing a point where rates should move higher, the Fed officials last month were worried that lagging inflation and a weak global economy posed risks too big to commit to a rate ‘lift-off’.

Spot gold hit a high of $1,141.75/ounce, its highest since July 17, and was up 0.4pc at $1,138.50. The US gold for December delivery was up 0.9pc to$1,137.90/ounce.

Spot gold has recovered nearly 6pc from a 5-1/2-year low of $1,077 hit in a late July rout, when investors cut their exposure on fears of further price declines.

It was on track for a second weekly gain, after snapping its longest retreat since 1999. Gold benefited last week from uncertainty posed by China’s surprise devaluation of its yuan currency.

Rising prices curbed physical gold demand in India and Chinese buyers, many of whom were reeling from losses in the stock market, remained scarce, cutting premiums on bullion sold in the world’s top two consumers.

Gold’s upside bolstered other precious metals, with spot platinum also hitting a five-week high of $1,025.20. Palladium gained 0.3pc to $612.75/ounce and silver rose 0.3pc to $15.34.

Gold prices in New York have climbed about 1pc since Aug. 10, the day before China carried out its first major devaluation of the yuan since 1994 in a bid to promote domestic economic growth.

The yuan drop will also mean that the metal, priced in dollars, will become more expensive for the nation to import.

Investors cut their holdings in gold exchange-traded products by $2.3bn last month as prices fell to their lowest level in five years.

Gold hit a five-and-a-half year low last month. While it has edged up this month, it is still down more than 40pc from its peak in 2011.

Figures from the World Gold Council industry body show that gold demand fell to its lowest level in six years in the second quarter.

There was a total of $2.3bn withdrawn from gold ETFs. ETF Securities, which launched the first gold-backed ETF more than a decade ago, puts the total withdrawal even higher at $2.447bn.

Copper

Copper futures fell below $5,000 a metric tonne for the first time since the financial crisis, dropping under a key level in a market that has been hit hard by concerns over the Chinese economy and by uncertainty for a metal widely regarded as a barometer of global economic health.

Copper’s decline comes as all metal prices continue their steep falls from the boom peaks of 2011. As with other base metals, copper has suffered from the oversupply that followed the boom and from concern over future demand from China, which consumes about 45pc of the metal.

The plunge in copper prices has sent the shares in some of the world’s largest mining companies tumbling while hurting economies from Chile to Zambia. Chile produces over 30pc of the world’s supply of copper.

Published in Dawn, Economic & Business, August 24th, 2015

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