OIL

OIL prices recovered above $50/barrel on Thursday, bouncing back from the week’s lows as the dollar weakened against major currencies.

Brent crude was up 50 cents at $53.50/barrel last Thursday. US light crude was up 50 cents at $50.27/barrel.

Both benchmarks have fallen more than $2/barrel from highs reached last Monday when investors bought heavily in the wake of an agreement by the Opec and Russia to cut production to reduce a supply glut.

Some analysts suggest promised output cuts may be insufficient to dent global oversupply and rebalance markets.

Since Opec’s announcement last week to cut oil production by 1.2mbpd – removing around 1pc of global oil supply from the market – oil prices bounced nearly 20pc to highs not seen since mid-2015.

The resurgence of US shale will undermine the Opec-fueled price rally, capping oil prices at roughly $50/barrel through 2017. That is the conclusion from the EIA’s latest ‘Short Term Energy Outlook’, which forecasts WTI to average $50.66/barrel and Brent to average just $51.66/barrel next year.

In fact, the oil bust could persist for another year, according to the EIA. Rising US oil production next year will postpone the projected withdrawals in oil inventories, pushing drawdowns off until 2018. In fact, the EIA actually projects inventories to climb once again, rising by 0.8mbpd in the first half of 2017. For the entire year, inventories could build at an average rate of 0.4mbpd.

In other words, the EIA does not expect the global supply/demand equation to come into balance until the end of next year, a much more pessimistic prediction than the markets have come to expect, especially following the Opec agreement.

Iran is showing signs of attracting major foreign investment in its long-neglected oil fields. Royal Dutch Shell PLC, had agreed to develop major oil and gas fields in Iran for the first time since sanctions related to the country’s nuclear deal were lifted at the beginning of the year. Shell and the Iranian government have just signed MoUs.

The two oil fields involved in the deal are estimated to have about 8.2bn barrels’ worth of recoverable oil, which is equivalent to about 15pc of the proven crude reserves in the US.

The French energy firm Total, which signed a multibillion-dollar contract with Iran for its huge South Pars gas field in November, is also now in talks about developing the Iranian oil fields.

Oil-hauling supertankers are bracing for the worst earnings year since 2013 as they become collateral damage in Opec’s quest to trim a global glut of crude.

So-called very large crude carriers, 1,200-foot vessels each hauling 2m barrels, will earn an average of $25,000/day next year, according to estimates. That’s 12pc lower than they were anticipating before the Opec took a decision on Nov 30 to cut collective output by enough to fill four ships a week.

Global airline earnings are set to suffer their first annual decline in six years after reaching a record in 2016 as higher oil prices clip margins, according to the industry’s main trade group.

Net income is likely to total $29.8bn (worldwide) in 2017, the International Air Transport Association said. That’s 16pc lower than the $35.6bn forecast for this year, a figure that itself represents a downward revision from the $39.4bn estimated in June.

While airlines this year have reaped record profits following a slump in the price of crude, IATA reckons a barrel of oil will average $55 in 2017, up from $44.60, lifting jet-fuel expenses to almost 19pc of overall costs

Gold

GOLD prices fell Thursday and for February delivery, the commodity was recently quoted down 0.3pc at $1,174/troy ounce on the Comex division of the New York Mercantile Exchange.

Bullion has shed more than 12pc since its post-US election peak of $1,337.40 on November 9.

Gold has become an accepted investment in the Islamic world for the first time as it can now be used as a commodity to back Sharia-based financial products, thanks to new standards announced recently.

The new rules will pave the way for Islamic financial institutions to trade not just gold but also silver in a much more actively fashion.

Gold transactions must be fully backed by physical metal and settled on the same day, the developers of the new guidance said, to observe Shariah’s distinction between real economic activity and speculation.

Gold joins equities, real estate, Islamic bonds (sukuk) and takaful (insurance) as vehicles approved for Islamic finance, said AAOIFI.

The launch of the Shariah Standard on Gold, offers guidance on the use of modern gold financial products.

Bullion’s only modest price recovery this year compared with other commodities has led the industry to cut spending on exploration dramatically to less than $4bn from almost $10bn in 2012.

Across the world, miners have instead spent their cash expanding existing deposits, improving efficiency or cautiously looking at acquisitions.

Published in Dawn, Business & Finance weekly, December 12th, 2016