Elizabeth Belugina, the Head of Analytics Department at FBS
Despite renewable energy sources, oil is still the world’s key commodity. In the first half of the year, Brent futures traded between $58 and $44.35 a barrel, while WTI fluctuated between $55 and $42. The overall bias was to the downside, although there were a number of rebounds.
Let’s see what factors are having an impact on oil dynamics and try to outline this market’s prospects for the next several months.
The main fighter with the market’s oversupply is the Organization of the Petroleum Exporting Countries (OPEC). OPEC and some non-OPEC producers agreed to cut oil production by 1.8M barrels a day since January 2017. In May, the cuts were extended until the end of the first quarter of 2018.
However, the market has serious doubts that the nations are really committed to supply cuts. The longer the prices remain low, the harder it is for the members to respect their pledges. Indeed, so far compliance among OPEC members has been worsening. According to the International Energy Agency (IEA), it fell in June to 78%, which is the minimal level since the start of the deal. The main breakers of the agreement are Libya and Nigeria, but even the bloc’s de facto leader Saudi Arabia now puts in limiting the production less effort than before. Estimates show that there was no improvement in July.According to a Reuters survey, the bloc’s oil output rose last month by 90K barrels a day to 2017 high.
OPEC members do try to amend the situation, at least verbally. Saudi Arabia pledged to further cut its crude exports from July, while Nigeria said it was willing to stop raising its production once it reaches 1.8M barrels of crude oil production daily. However, Ecuador stepped back from the deal and announced that it plans to gradually increase output. Even if Ecuador’s actions have a small impact on the overall supply, the market’s sentiment will likely suffer.
It now increasingly looks like the existing steps of OPEC are not enough to push the prices above $50 a barrel and make them settle there. Will the cartel keep on knowing that there are other players who will benefit from their supply cuts?
The beneficiaries from the OPEC-led production cuts are none other than the US shale oil producers. The IEA predicts a 53% upswing in shale investments this year and the United States will account for the most of it. The US Energy Information Administration lifted its 2017 US output forecast in May to an average of 9.31M barrels a day.In June, it raised 2018 production forecast as well.
One of the biggest advantages of the US oil industry is that it is extremely flexible. American drillers adapted to lower oil prices by reducing drilling costs and increasing production efficiency. The number of rigs operating in US fields has more than doubled in the past year. US producers are enjoying the higher prices for future delivery, which they managed to lock in during the temporary price boost caused by OPEC. Naturally their ability to remain in business has its limits. Estimates show that if prices fall towards $40 a barrel, shale production will become loss making and curtail. On the flip-side, once the prices recover, drillers will be as quick to reopen production.
US supply comprises production and inventories. As for the latter, the latest trend is for the US oil stockpiles to contract: this is the first year since at least 2000 that the US oil inventories have fallen between the end of February and the start of July. Although on the surface this may look bullish for oil, deeper analysis shows that this decline happened because the US significantly increased oil exports. Global oil inventories are as big as they have been at the start of the year, and this doesn’t help crude oil quotes.
When we talk about the oil market, the consumer side of things is equally important.There are views that stronger global economic growth will push up oil prices in the second half of 2017. In addition, oil consumption tends to be always higher at the end of the year.
To be fair, oil may enjoy seasonally higher demand in the current quarter. Domestic consumption in the Gulf nations rose as domestic buyers need fuel for power generators during the summer. Oil demand in the United States is also on the upswing – it a peak of the driving season, although demand for gasoline is falling behind the demand for volatile “other oil products”, that may be a worrying sign.
At the same time, demand in key Asian crude importers is faltering.China – one of the world’s main oil refiners – doesn’t seem to be a very eager oil’s buyer. Chinese state refiner Sinopec has been reducing its oil refining output by around 240K barrels a day between June and August due to weaker fuel demand and rough competition with private independent local refiners. India and Japan also have some domestic issues which are putting a break on their demand. In particular, Indian demand was hit by the recent demonetization, while in Japan the reasons for lower demand are more profound and include aging population and increasing reliance on alternative fuels.
There’s a great variety in predictions of future oil prices. Still, taking into account everything listed above, it becomes clear that substantial fundamental drivers for a rally in the oil market are absent. OPEC’s cuts don’t take much out of the market, and with the course of time, it will be harder for the producers to sustain discipline in adherence to their pledge.
Of course, there are contingencies that may derail the outlook for the oil market. Factors which are hard to predict like tensions in the Middle East, turmoil in Venezuela and instability in Libya can reduce supply. At the same time, higher prices in July create favorable conditions for the US producers. Their presence at the market creates a ceiling for the oil prices. In these circumstances, the impact of any improvement in demand for oil will likely be negated by higher supply. All in all, it is hard to see either supply or demand considerably outweighing one another in the coming months.
As a result, we expect oil to fluctuate around $50 a barrel. It seems that the market has found a medium-term balance around this level. The overall bias may turn bullish by the end of the year, although only slightly.
Energy stocks drag down FTSE 100, IG Group slides
By Shivani Kumaresan
(Reuters) – London’s FTSE 100 slipped on Thursday, weighed down by falls in energy stocks as oil prices slid after a surprise increase in U.S. crude inventories, while IG Group tumbled on plans to buy U.S. trading platform tastytrade for $1 billion.
The blue-chip FTSE 100 index lost 0.4%, while the domestically focussed mid-cap FTSE 250 index also slid 0.4%.
Energy majors BP and Royal Dutch Shell fell 3.2% and 2.5%, respectively, and were the biggest drags on the FTSE-100 index. [O/R]
“What is holding back the UK is a lack of tech stocks to capture the ‘rotation’ back into tech seen since Netflix results,” said Chris Beauchamp, chief market analyst at IG.
“Stock markets overall are much quieter today, looking so far in vain for a new catalyst for further upside.”
The FTSE 100 shed 14.3% in value last year, its worst performance since a 31% plunge in 2008 and underperforming its European peers by a wide margin, as pandemic-driven lockdowns battered the economy and led to mass layoffs.
British Prime Minister Boris Johnson said it was too early to say when the national coronavirus lockdown in England would end, as daily deaths from COVID-19 reach new highs and hospitals become increasingly stretched.
IG Group tumbled 8.5% after announcing plans to buy tastytrade, venturing into North America after a stellar year for the new breed of retail investment brokerages.
Ibstock jumped 7.3% to the top of the FTSE 250 after the company said fourth-quarter activity benefited from better-than-expected demand for new houses and repairs.
Pets at Home Group Plc rose 2.2% after reporting an 18% jump in third-quarter revenue, boosted by higher demand for its accessories and veterinary services as more people adopted pets during lockdowns.
(Reporting by Shivani Kumaresan in Bengaluru; editing by Uttaresh.V and Mark Potter)
Wall Street bounce, upbeat earnings lift European stocks
By Amal S and Sruthi Shankar
(Reuters) – European stocks rose on Wednesday after Dutch chip equipment maker ASML and Swiss luxury group Richemont gave encouraging earnings updates, while investors hoped for a large U.S. stimulus plan as Joe Biden was sworn in as president.
The pan-European STOXX 600 index closed 0.7% higher, getting an extra boost as Wall Street marked record highs.
All eyes were on Biden’s inauguration as the 46th U.S. President, with traders betting on a bigger pandemic relief plan and higher infrastructure spending under the new administration to boost the pandemic-stricken economy.
Tech stocks rallied to a two-decade peak in Europe after ASML Holding NV rose 3.0% to all-time highs on better-than-expected quarterly sales and a strong order intake for 2021.
Meanwhile, Richemont rose 2.8%, after posting a 5% increase in quarterly sales as Chinese splashed out on Cartier, its flagship jewellery brand.
Britain’s Burberry jumped 3.9% after it stuck to its full-year goals, saying higher full-price sales would boost annual margins, while Asian demand remained strong.
The pair boosted European luxury goods makers that are heavily reliant on China, with LVMH and Kering gaining between 1% and 3%.
“Any sign that retail spending is picking up in China is going to be a boost to the Western markets and those heavily exposed to it,” said Connor Campbell, financial analyst at SpreadEx.
The European Central Bank is set to meet on Thursday. While no policy changes are expected, the bank could face more questions about an increasingly challenging outlook only a month after it unleashed fresh stimulus to bolster the euro zone economy.
“With the new round of easing measures fully in place and no new forecasts to be presented tomorrow, it should be a fairly uneventful day for the euro,” ING analysts said in a note.
Italy’s FTSE MIB gained 0.9% and lenders rose 1.6% after Prime Minister Giuseppe Conte won a confidence vote in the upper house Senate and averted a government collapse.
Conte narrowly secured the vote on Tuesday, allowing him to remain in office after a junior partner quit his coalition last week in the midst of the COVID-19 pandemic.
Daimler AG jumped 4.2% after its Mercedes-Benz brand unveiled a new electric compact SUV, the EQA, as part of plans to take on rival Tesla Inc.
Germany’s Hugo Boss added 4.4% after Mike Ashley-led Frasers said it boosted its stake in the company.
(Reporting by Sruthi Shankar and Amal S in Bengaluru; Editing by Shailesh Kuber and Arun Koyyur and Kirsten Donovan)
Miners lead FTSE 100 higher on earnings cheer
By Shivani Kumaresan
(Reuters) – UK’s FTSE 100 rose on Wednesday as miners gained after a strong production forecast from BHP Group, while encouraging updates from luxury brand Burberry and education group Pearson drove optimism about the earnings season.
BHP Group Ltd climbed 2.8% after it forecast record iron ore production for fiscal 2021, helped by high prices for the commodity. Other miners Rio Tinto, Anglo American and Glencore rose more than 2%.
Global markets rallied in anticipation of more fiscal spending as Joe Biden prepared to take charge as the 46th U.S. president.
“There is a view in the markets that more spending is in the pipeline, after all, Mr Biden will want to start his presidency on a positive note,” said David Madden, market analyst at CMC Markets UK.
The FTSE 100 index rose 0.4% and the domestically focussed FTSE 250 index added 1.4%.
The FTSE 100 has recorded consistent monthly gains since November after the sealing of a Brexit trade deal and hopes of a vaccine-led economic recovery, but has recently lost steam as tighter business restrictions sparked fears of a slow rebound.
Burberry rose 3.9% as it stuck to its full-year goals and said higher full-price sales would boost annual margins and Asian demand remained strong.
Global education group Pearson jumped 8.6% after its global online sales grew 18% in 2020, helped by strong enrolments in virtual schools.
WH Smith Plc surged 10.4% to the top of the FTSE 250 index as its trading during Christmas was ahead of its expectations.
(Reporting by Shivani Kumaresan in Bengaluru; editing by Uttaresh.V, William Maclean)
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