RIYADH: Oil prices are in for a slide. With growing global conventional and non-conventional output and slowing consumption growth, lower oil prices seem a certainty.
China has been the constant, the sole star performer in the global economic stage, all these recent years. But things seems to be changing there too.
Trend growth is slowing down and markets have been shaken up by the actions of the People’s Bank of China, endeavouring to tame a virulent credit boom. In the first two months of 2014, industrial confidence and output indices, retail sales, fixed asset investment and credit creation, all were weaker than anticipated.
Slowing Chinese economic growth, chronic overcapacity and rising debt service problems in key industries are becoming common. The recent drop in the Chinese currency, and the sharp fall in copper and iron ore prices are the latest high-profile manifestations of China’s changing outlook.
Yet, despite all this — a combination of geopolitical events in Syria, Libya and Nigeria have in the meantime — prevented any significant price slide. Yet, how long markets can stand firm — above $100 — remains a big if?
In the short term too, the overall picture is not robust. The price of oil extended losses on Friday as seasonal maintenance of refineries crimped US demand and a stronger dollar made the commodity more expensive.
Eminent industry pundit Philip K. Verleger Jr, the former professor at the University of Calgary, a former director of the Office of Energy Policy at the US Treasury in the Carter administration, who now heads P.K. Verleger LLC, is of the opinion that the world oil price could drop $10-$12 per barrel.
He is of the view that the decision of the Obama administration to release crude from Strategic Petroleum Reserve (SPR) could impact the markets significantly, add to pressure and could have a speedy impact on Russia.
The SPR now holds 694 million barrels of crude and despite the International Energy Agency requirement to hold reserves equal to 90 days of imports, the US could easily sell 500,000 to 750,000 barrels per day for up to two years without breaching this obligation, underlines Verleger.
And then the veteran Washington operator suggests, ‘if the US did this and all else remained equal, the world oil price would drop $10-$12 per barrel.’ Weakening of the markets could soon be a strategic objective for Washington, it now seems.
Brian Weepie, a researcher at S&A Resource Report, is also of the view that crude prices are in for a fall in near term. But his reasons are different.
He points out to the rally enjoyed by crude markets over the past few months. The same situation was played out in 2013 too, and it ended with a sharp correction, he reminded.
Underlining that condition similar to last summer are once again in play he asserts that when Amber Lee Mason and Brian Hunt warned last year that crude oil was due for a sharp correction, they used a simple, yet effective, indicator to predict that decline — the “Commitment of Traders (COT).”
The COT report measures the number of participants on each side (long or short) of a trading position, showing the positions of oil producers, refiners, and traders (speculators).
After the rally last year, most traders were betting on oil prices rising. And when a huge number of market participants take one side of a trade, the trade often moves in the opposite direction — it’s the nature of the market — he asserts.
When the price drops, traders sell. The selling forces the price even lower. That’s what we saw in August (2013)... And it’s happening today, Weepie points out.
The COT report now are also showing that the number of speculative long-side trades in the market is at an all-time high.
Like in August 2013, the market today too seems ready to punish the speculators. It is hence likely the price will continue to fall as once-bullish speculators sell their positions, Weepie asserts.
A number of factors are in play. Fundamentals continue to point to a softening market — in the near to mid-term.