Month: January 2016

Oil rose nearly 7 percent on Friday to above USD 31 in its largest weekly rally in three months, as a cold front sweeping the United States and Europe as well as firmer financial markets gave traders reason to cash in on record short positions.

Crude futures were poised for their first weekly gain this year, but analysts said there had been no shift in the fundamental backdrop of supply that far exceeds demand and swelling inventories of unwanted oil and oil products.

“There is no fundamental justification whatsoever to think that the current downtrend is changing,” said PVM Oil Associates analyst Tamas Varga.

“All one has to do is look this month’s report from the IEA to see that, especially the first half of this year, the market is going to be oversupplied,” he said, referring to a report by the Paris-based International Energy Agency.

Brent was up USD 2.05, or 7 percent, at USD 31.30 a barrel by 6:12 am EDT (1112 GMT), off this week’s 2003 low of USD 27.10 and heading for a more than 6 percent weekly gain.

The oil price slump is hitting home with layoffs and spending cuts but there may be one positive development amid the rash of bad news: companies are tightening their belts more swiftly.

“The silver lining is the velocity–how fast all of these companies have moved to cut cost and build efficiencies. It’s measured in weeks and months while in previous cycles it would take much longer,” said Thomas McNulty, a director at consultancy Navigant Capital Advisors,.

This should enable companies with healthy balance sheets to stay in the green, he told CNBC’s The Rundown.

Oilfield services giant Schlumberger was the latest casualty from the oil crash, posting its first quarterly loss in 12 years, prompting the company to cut another 10,000 jobs and initiate share buybacks, the company said on Thursday.

Oil prices have slumped 70 percent since they started their extended decline in the summer of 2014 with both US WTI light sweet crude and European Brent moving just below USD 30 a barrel in Asian hours on Friday after hitting 12-year lows recently.

The persistently low price is due to a supply surplus with the boom in shale oil contributing to the glut exacerbated by the refusal of producing group OPEC to cut its 30-million-barrel-a-day production ceiling. Saudi Arabia, the most influential member of OPEC is sticking to its strategy of low-cost production to squeeze out higher-cost producers elsewhere.

The strategy however is taking longer than Saudi expected, contributing to its record high deficit in 2015 and spurring the country to introduce austerity measures such as cutting energy subsidies.

“Some of the players in the Middle East may have the ability to produce at lower cost but they are also paying for everybody’s education, they are paying for infrastructure, they are basically national companies and that allows a lot of the free market competitors in North American to find a way to make money at lower prices for longer and to compete. They are built to compete head to head every day and it’s very different with the national oil companies,” said Navigant’s McNulty.

The rout is prompting a flurry of price downgrade with ratings agency Moody’s the latest to cut its 2016 price estimates for crude-oil prices, to an average of USD 33 a barrel this year for both WTI and Brent, USD 7 lower than its forecast for WTI and USD 10 lower than its previous forecast for Brent.

“Today’s large global inventories will still take time to unwind and will continue to drag on prices even as demand picks up,” said Terry Marshall, a Moody’s Senior Vice President

The US Energy Information Administration reported Thursday that nationwide crude stocks rose by 4 million barrels, more than the forecast 2.8 million barrels.

In a confused market, there are contrasting price forecasts.

Michael LaMotte, an oilfield services analyst and senior managing director at Guggenheim Securities expects supply to tighten, driving prices to USD 100 a barrel by 2018.

“What we have right now is an overproduction problem, not an excess supply or an excess capacity problem,” he said.

With USD 30 a barrel oil prompting a supply response in terms of lower capital expenditure, LaMotte expects US onshore production to decline by 1.2 million barrels a day in the next 12 months, prompting the market to drawn down on inventories from the second quarter onward to meet demand.

Another USD 500-600 billion will be needed to ramp up production to increase by 1 million barrels a day from 2018 in the U.S—far below the USD 50-60 billion that the sector is generating this year, he said.

“It’s going to take a lot higher oil prices and a lot of capital markets activity to generate the amount of cash that will be required to deliver the production that the world needs just a few years from now.”

China’s enormous, complex economic transition will keep emerging markets under pressure for the next five years, Goldman Sachs has warned.

In report setting out its forecasts on China, the bank told clients to “adjust their exposures” to EM assets.

“The country is trying to shift its economy away from an export-driven and investment-led one to a more balanced, consumption-oriented economy,” Goldman said in the report, headlined “Walled In: China’s Great Dilemma.”

“A complex and interconnected reform agenda has never been achieved on this scale. The transition, if accomplished, is unlikely to be smooth.”

That means China will spur market volatility not just this year, but for the next five years, with emerging markets likely to bear the brunt of the hit, Goldman said.

“We therefore recommend clients adjust their exposures to emerging market assets,” it said.

“Developed economies will not be immune from any volatility emanating from China, but the direct and indirect economic impacts will be lower for them; still, we expect that financial markets in developed countries will overreact as they did in August 2015 and again in early 2016.”

“China has been slowing down for years and will continue to slow down. The official data greatly overstates the actual growth rate, but whatever it was last year, I think we will lose another percent, a percent-and-a-half of growth,” Willem Buiter, the chief economist at Citigroup, told CNBC on Thursday at the World Economic Forum in Davos, Switzerland.

“So while this isn’t a full-scale recession, it is definitely a growth recession and it will mean continued downward pressure on commodity prices and it will also mean continued weakness in demand for the exports of countries in the supply chain to China and indirectly for the rest of the world. So it is bad news; it is entirely avoidable with the right policies, but the Chinese authorities are not yet ready to implement these right policies,” he added.

Global economic growth at current exchange rates slowed to around 2.3 percent year-on-year in the fourth quarter of 2015, according to a Citi report out on Thursday. The bank said this was roughly equal to 2 percent year-on-year, “adjusted for the probable mis-measures of China’s GDP growth rate.”

Chinese official economic data is often said to be exaggerated, although the magnitude is a matter of contention. The country reported growth of 6.9 percent in 2015.