What To Expect At $20 Oil?

Ladies and Gentlemen

As we saw Oil dip below $30 per barrel yesterday, we have seen somewhat of an overnight reprieve in the Oil trading sessions of Asia and Europe. However,  it is very hard to find reasons to be optimistic in current conditions, especially with the over-supply and concerns about China growth. The pain low Oil prices has so far caused for Oil investors and Oil producing countries may just be a taste of things to come as we head to $20 per barrel. 

We are now confronting $20 Oil and the likelihood is fairly great. Clearly Oil markets cannot maintain these prices (below $30) for very long and the question is for how much longer?  The Gulf Economies as well as other Oil producing countries are suffering immensely, such as Malaysia - who are losing $68 million for every $1 decline in the price of Oil. Oil producers too.. EconocoPhillips - losing $2 billion for ever $10 decline and yesterday Petrobras announcing it is lopping $30 billion of it's 5-year spending plan... Hours late, BP announces that they would slash 4,000 jobs. 

If there is some sort of optimistic note to leave you on and that was last year China (2nd largest consumer of Oil) imported a record amount of Crude, but that was simply taking advantage of low prices... and if/when prices go up they can start taking advantage of their huge stockpiles. 

$20 oil just acts to dig an even deeper hole from where you need to be before the markets look to open up again! 

Best of luck guys! 

Anish8FX @Atom8.com

The 2015 Oil Price Conundrum

Ladies & Gentlemen, 

Over the past year Oil has "started" its biggest price decline since the Financial Crisis. Today the price of Oil went below $40.00 and the Markets are currently sitting on this level (3 month low), to me - waiting only for the next break lower. This move lower was supported by yesterdays data from the US showing that Crude Stock Piles have been expanding for the past 8 weeks now. 

Here is where the trouble lies.. Demand is at record highs, especially from India and is expected to rise by 1 million barrels per day every year in this decade. But the issue is with Supply. The Supply-side is controlling the Market and it does not seem to be slowing! We have way too much Oil & OPEC led by Saudi Arabia have been more focused on targeting Market share, rather than price stability. 

How much Supply do we actually have? Well have a look at the Chart below and you can see from the "Surveillance Map" the Orange Line mapping out 530 km (about 3 billion barrels of oil). If you were to put these in Oil Tankers and line them up together, that is the route... From London to the south of Glasgow. 

Chart of the Day

Source : @JavierBias2

What about Geo-Politics? Well the Oil prices spiked up as an immediate reaction from the Paris attacks. To me, that could just be a panic trade and the Fundamentals are clearly running the Oil Market here. Syria, in reality is not a big Oil producer but is in the neighborhood. I think you would need to see a real Geo-political shock in a large Oil producing country to have a sustained effect on Oil Prices. 

Could we see $30? - Yes!  I think the markets will tick away to $30 during the course of 2016 and perhaps even lower into 2017. Ultimately, it is the refiners that buy the Crude Oil and if they are not making any money anymore... heading into winter... they want to keep their margins growing. They would definitely be in for a hard time for the next few years to come. 

As always, Trade smarter. 

Anish8FX @Atom8.com

The Saudi Spending Phenomenon - Will It Ever Stop?

Ladies & Gentlemen,

All Market eyes have been eyeing up Oil Prices, some are calling a further slump in 2016 and others are a bit more optimistic (seeking the $50 mark). However, with these lower prices, how has the World's biggest Oil player reacted & will it really hurt the Saudi Economy?

You would of actually never of guessed there to be an Oil slump from the shine of the Saudi economy and that is no accident, it is Saudi (well-planned) policies in action. The wealth from the Oil revenues has been shared and the public have firmly supported the Al Saud family, even as turmoil beckons on the horizon.

The IMF predicts that within 5 years, the Kingdom will run out of Financial Assets... But is that really true (raised eyebrow)? In theory, if they continue to spend at the rate they are & Oil prices remain low, then yes! However, they currently stand at a (Positive) 100% net cash : GDP ratio & if you look at a Country like Japan, who's net:GDP is -200%, I begin to differ with the IMF. Saudi literally are operating with no debt.

figure : Bloomberg source

Can this be protected for the Future? What if Oil prices continue to fall? I think you will start to see Saudi Arabia slowly decrease their heavy military contracts & begin opening their Economy up to foreign investment, by way of issuing Government debt or opening investment into Saudi stocks. More recently, the Saudi government to pull in about $70bn from Equity markets to begin adding more liquidity within their own markets -  "Welcome world to the Tadawul".

We could also see (like Qatar) a higher increase in Western Property purchases... Again another indication for potentially more spending.

Saudi issuing Debt? Really? How friendly would that be? Honestly speaking (ok - be careful here Anish #whips...) The country has been caged about opening it's Markets to the World and if done, would be extremely gradual, as they drift away from traditions. Most Governments generally support their Economy, by way of tax receipts.
However, over the past 3-4 decades, Saudi has been funded with Oil receipts.

Reality Check.. Oil still costs $3 to get out of the ground and with current production levels, Saudi are still generating $300-400bn from Oil revenues alone (at least)!

It looks like the Saudi powerhouse is only going to get stronger, especially as Investors from around Asia flock in. The next 5-10 years will be critical for the Kingdom, to really impose its strength as the World's largest Economy, alongside China.

Trade Smarter & Best of Luck for the week ahead.

Best wishes
Anish @ Atom8FX

The Vicious Cycle Of Oil

Ladies & Gentlemen

Oil once more trades at a near 2-month low and as vicious as it has been, the oil price collapsing cycle does not look to be over just yet. However, large institutions and Central Banks further seek a longer period of stability, especially in the eyes of the Bond Markets.

The US are still heavily over-supplied and refineries continue to close down, due to mounting costs  from a alack of productivity. The big players are still looking at holding sub $50 and hedging their risk with the Futures Markets... These "players" may be the ones the Central Banks turn to in the near future to assist in the un-cuffing of this downward spiral.

OPEC have been heavily pressured by Venezuela (Country with the World's largest known Oil reserves) to do something about the Oil price and have been supported by one of Africa's biggest Oil producer, Algeria. Contrary to views from the Gulf who are welcoming the lower prices, seeing it as a chance to reform & these contrast of views continue to bear onto a larger Geo-Political issue. But how big is this issue?

Saudi Arabia, the world's largest Oil mover has been doing things recently, that in the last 30 years have been unimaginable ;
1. Withdrawing money from overseas;
2. Delaying contract payments; and
3. Taxing lands.

So how does the Market quantify these issues?.. Let's pause for a second and cast our mind backs to mid 2007 when the Oil price hit $145.00 per barrel and the Gulf generated more money that they knew what to do with & the fact remains that Saudi's Debt:GDP ratio is still less than 2% and in the next 10 years is estimated to stay below 7%... The main Gulf states could actually live comfortably for several years from these revenues built.  So contrary to the "Geo-Politics" - Investors are more focused on the supply-side issues and may be more keen to ignore the political nature surrounding the MENA regions.

Storage is still reaching tank-tops and if this trend continues, we may see for the first time in 20 years - oil investments declining for two consecutive years and this may be an indication for future oil markets.. as they look to continue their downward spiral.

Optimists still seek a bottoming level - looking at Iran supplies for next year to help boost $60+ for 2017 (perhaps a fascinating new dynamic for the near future), however the fundamentalists outlook is further lower to find a strong re balance in the market.

Best of luck

Anish

Crude Oil - A Bargain Hunt?

Dear Traders

As we enter the final quarter in 2015, investors are watching the price of Crude Oil with an eagles eye.   Oil prices have been on a roller-coaster ride over the past few weeks, coming from 6-year lows and with talks of $30 per barrel (being the new normal) a few months ago, we have seen a remarkable comeback as the $50 mark was crossed for the first time since July.

It looks like more short-term players have seen this opportunity above $50 for greater profit-taking and more sizable positions seem to have taken the market back to $47 & if this price is not screaming for a "Pull-Back" before year-end.. I don't know what is!  However, more "conservative" fundamentalists focused on the over-supplied commodity are ignoring the price action and looking at more longer-term consolidations up to year-end & maybe till future rate-hikes - the recent drop in oil-rig counts did not help either! 

Idea

OPEC remain firm that demand should begin to increase in early 2016 and this should naturally reduce the worried over-supply figures, resulting in a more "balanced" market - which if true, should see investors price in a more bullish price action heading up to year-end.  However, warnings persist from the International Energy Agency insisting over-supply is set to stay. Although this view did not stop the Chinese "Bargain Hunters" from buying up more of the market last month.

With Russia now heavily involved in Syria and also stamping its foothold around the Middle-East's perimeter, the geo-political dynamics of the Oil Markets have a new found tension from the prospect of a potential stand-off between the US & Russia, as Russia looks at prioritizing it's hand in the Middle-Eastern Crude supply.

Recent ISIS attacks on production facilities in Norther Iraq have also added to this dynamic and of course, oil nations and businesses are keeping this in mind when attempting to analyse their quarter-end plans.

Overall, it is important to note that there is still an oversupply (surplus of around 1 million barrels per day). However, the "rebalance" force should help calm this supply over the next 12 months, where a turn upwards of $70-75 would really indicate a rebalanced market.

Trade OIL with Atom8

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Best of luck with your trading

Anish 

FX & Precious Metals, Atom8 Financial Services LLP

2nd Floor, Centenary House, Palliser Road, London W14 9EQ, UK

T: +44(0)20 3405 3910 | M: +44 (0)7983701816 | anish.lal@atom8.com | www.atom8.com

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The Royal Rumble of US Crude

US Crude rallied over 6% yesterday - marking the biggest single day gain for 7 weeks -  despite the prospect of sanctions being lifted on Iranian exports & also despite storage levels being maxed out! (As discussed in post : Is Iran about to flood the Oil Market?) 

Let's take a step back to Thursday, when top analysts from Goldman Sachs & Morgan Stanley remained very bearish and did not expect any real turnaround in the price of Oil. 

The Boost for Stocks 

This morning the FTSE 100 was lifted by the major Oil Stocks and the US Future exchanges are also trading higher of the back of this lift. 

The Stock Market has been affected by the bullish US $ and this brief relief has become a catalyst for the gaining energy sector - as also yesterday's 2% rise in the S&P Energies showed. 

Why is a weaker USD & rising Oil better for Stocks?

The rising USD has been putting a dent on the earning of multinationals - affecting the major corporations! Hence the reason why we saw a nearly 3% decline in earnings season for the last quarter - For the first time in 6 years!  

The Oil Price collapse did not help the Stock market either - However, the recent rallies in Oil have supported more bullish traders searching for a technical bottom in this greasy commodity. 

Post NFP turnaround? 

Probably the most highest miss of recent times was Friday's NFP result - around 120K less than expected!  - Traditionally NFP sets the tone for monthly trends & we saw some of this "worse than expected" NFP being priced from the ADP release. However, did we really expect it to be that bad? 

However, as last noted by Mrs Yellen - even though payrolls may disappoint - the average hourly wage has been increasing by nearly 0.5%. 

In this case, what is the real unemployment rate?... (I will leave that one for you to ponder)... 

April Crude Forecasts 

I think that (despite my recent postings) the Oil markets are likely to slowly churn along until the end of the year. Shale production is expected to slow down in December & the Bank's latest reports suggest that $50 will remain a benchmark before increasing to $58-$60 by September this year. 

Although, we are still in an OVER-SUPPLIED market and this does not look like slowing down. The US reached another record high at the end of March with around 471 million barrels in storage. 

Oil producers have most definitely been the most effected - feeling the full impact of falling prices & with Iran set to finalise on a decision at the end of June... are we about to see more World Supply? How will OPEC control this?  Adam Longson from Morgan Stanley thinks that no real impact of the Iran deal will be felt until 2016..

A bullish move past $60 a barrel will for sure set the tone for a bull move & we could expect to see Stocks rally further. However, there is no real instability in the USD & not really on the cards for the near future.... A tough one! 

Welcome to the Royal Rumble of Crude!

But then why will Oil rally? Will OPEC allow for a $10-$20 per barrel Oil Price? 

Is Iran about to flood the Oil Market?

Dear Readers

Trust you all had a blessed weekend.

In my post : Oil to $20 by 2016  looks to be supported, perhaps underestimated by the upcoming decision on Iran's nuclear deal & also talks of removing Economic Sanctions for Iranian Crude Exports.


Potentially one of the Middle-East's biggest economies, Iran has been barred out by the West in refusing to give up it's Nuclear regimes.


However, new developments have come from talks between Iranian negotiators & world leaders continued in Lausanne this weekend.





Tehran - A sleeping Oil Giant

Since Economic sanctions had been placed on Iran, Tehran has been frozen out from the International Oil markets & denied access to Investment leading to key developments in the Oil/Gas industries.

With Oil prices pressured by the over-supply - any increase in Iranian output could easily speed up this decline down towards $20 per barrel.

The Iranian Oil minster mentioned that they could easily increase production by 1 million barrels per day, almost immediately after sanctions are lifted.

Trouble with OPEC & Saudi Arabia 

A potential limitation to this "flooding" impact comes from OPEC - the 12 member cartel controlling a 3rd of the World's oil supply. It currently maintains a quota system that Iran would have to negotiate.

It is unlikely that Saudi Arabia will be in favor of any increase to Iranian exports & their ongoing meetings up until June will tell of these tales.... However, oil may reach $20 by then already!

Stay tuned in for more....

Trading Oil with Atom8... Coming soon for April 2015.

- Peace & Love

Anish