12 February 2015
Sales Trader, Client Trading Services, Saxo Capital Markets
Oil prices have fallen by around 60% over the last seven months. Severe volatility in both Brent and WTI crude has made it difficult for traders to gauge in which direction prices are headed next. The answer may lie in the fundamentals.
The rollercoaster ride in oil markets continues this week as news that US inventories have reached a near-80 year high sent oil prices lower.
According to the US Energy Information Administration, US crude stocks rose by 4.9 million barrels last week to 417 million barrels, the highest level since records began in 1982. The news sent oil prices lower before they soon recovered. At 8:30 am GMT on Thursday, Brent Crude was trading at $55.85 a barrel while WTI was trading at $50.15 a barrel.
Falling economic growth in big oil consuming nations like China and India has driven demand for oil lower in recent months causing prices to plummet. Add to that the additional supply generated by shale gas exploration in the US and it is easy to see why oil has moved into a bear market.
What is perhaps more remarkable is the speed and degree with which oil prices have fallen. WTI Crude oil was trading at a $115 back in June 2014, but after the Organization of Petroleum Exporting Countries (OPEC) failed to curb supplies and oil inventories globally began to accumulate, the price slid to $44 a barrel the end of January 2015.
OPEC's decision last November to hold oil production at current levels rather than make cuts sent oil prices tumbling. Photo: Shutterstock
The lower oil prices have eased pressure on consumers but have had a detrimental effect on some of the world's largest oil producers. Russia's economy is still trying to recover from the Rouble crisis and its reliance on oil revenue will only add to its woes. Some of the small OPEC producers like Iran and Venezuela are also being squeezed by the fall in oil prices. There are also reports of a number of shale gas exploration projects being abandoned as future revenues make investments less profitable.
What does this mean for traders?
The big question on traders' minds is whether oil prices have hit rock bottom yet. On the one hand, fundamentals don't seem to justify a major recovery at this stage considering expectations that the global supply glut could rise even further over the coming months. Crude oil inventories at Cushing, the delivery hub for WTI crude oil, will be a key measure to watch out for. They rose by 2.5 million barrels and have more than doubled since October 2014. With prospects of refinery strikes slowing demand for Crude oil, this level may rise even further over the coming weeks and keep WTI trading within a range of $60-45 a barrel.
One the other hand, if oil prices drop even lower, OPEC may feel the need to intervene and support the market. We have already seen OPEC's leaders pay lip service. Its Secretary-General Abdullah al Badri recently claimed prices could rise as high as $200 a barrel by 2020. This seems inconceivable at present but if leading OPEC producers like Saudi Arabia signal plans to cut supply, we could see oil rise as high as $65 a barrel.
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