Oil prices will be pressured this week by a stronger US dollar, ahead of OPEC’s end of year meeting on Friday night our time as Saudi Arabia sent conflicting hints to global markets late last week.
Oil will be whacked this week if the European Central Bank expanded its quantitative easing program as it is widely expected to do. That will push the US dollar higher and most commodity prices lower as a result.
The markets already worried about the impact of the Fed’s mooted rate rise in the middle of December – but on Friday there’s the US jobs report for last month which could add further downward pressure to oil prices (and other commodity prices as well).
But these pressures are adding concern to the outlook for oil held by the powerful Saudi’s.
The Saudi’s continue to rule out any cuts in production (even though their output has been easing slowly for the few months), but at the same time, senior officials have started expressing concern about future production levels and wondering what the downturn in prices will do to investment and supply.
It’s a mixed message that seems to be trying to speak to two groups – other producers and western consumers.
But the Saudi’s are also reportedly under pressure in key markets in Asia and Europe from cheap oil from Russia and Iraq, with the extra production from Iran to start flowing early next year, which will add to the competition and pressure on prices.
Oil prices settled sharply lower on Friday night in weak holiday trading, thanks to the stronger dollar and fears about the global oversupply of crude.
Weak industrial profits data from China and a regulatory crackdown on Chinese stockbrokers also put pressure on the commodity on Friday night, as fears about oil demand resurfaced.
West Texas Intermediate futures in New York fell $US1.27, or 3.2% to $US41.71 a barrel.
In London Brent crude lost 1.6% at $US45.46 a barrel. Trading volumes were thinner than usual as most financial markets were open for half a day.
Prices were down around half a per cent to 1% for the week, despite the price rise earlier in the week after the downing of a Russian jet by Turkey.
There have been repeated statements from senior Saudi officials that the country would no longer prop up the oil market, rather than cut output to guarantee $US100 a barrel for high-cost rivals, especially other OPEC countries (read Nigeria and Venezuela).
After raising production to a record 10.6 million barrels a day in June — almost 1 million barrels above the 2014 average — output fell to 10.3 million b/d by October, the latest data from OPEC show. And despite the higher production, exports to the US have dropped nearly 30% in the past three years thanks to the US oil shale boom, which continues to slow, but not as fast as previously thought.
US oil stocks are still at 80 year highs and production hasn’t fallen below 9 million barrels a day for more than a year, which means the US market is awash with crude.
So is the rest of the world and when you throw in surplus diesel and jet fuel, there’s more than three billion barrels of oil and its products in stock, according to the international Energy Agency.
The Financial Times reported late last week that senior Saudi officials now have a different message.
Responding to the scrapping of $US200 billion in investment planned for the global oil and gas business, Saudis are now worried that the price falls have gone too far and are now damaging the fabric of the global industry.
The Saudis say $US700 billion in new investment will be needed over the next few years to maintain production at or around current levels. The surrent low prices raise doubt that sort of investment will occur.
“In recent weeks, in public forums and private briefings, they have emphasised the danger of future supply shortages as the oil industry has slashed investment in new projects,” the FT reported on the weekend.
"Prices fell further than they ever anticipated, they say, remarks that for many in the oil market imply the OPEC kingpin wants the year-long oil rout to come to a close.
“Saudi officials say they are not about to reverse the policy that saw them open the taps and prioritise their long-term exports over short-term financial gain. But behind closed doors they say they want prices to stabilise between $US60 and $US80 a barrel.
“That level, they believe, would foster oil demand but not encourage too much supply growth from alternative sources — a goldilocks scenario. Market watchers say that by focusing on the future outlook the kingdom can slowly coax the price higher without abandoning its strategy,” the FT reported.
Oil prices could be overwhelmed by the combination of the ECB easing, if it happens, the US jobs report and some apparently hard line comments at the OPEC meeting.
But the FT and other oil industry media are now warning us not to be surprised by a change of tone or wording by the Saudi’s at Friday night’s OPEC meeting. So could it be a case of ‘oil price surge looms’?
