The sell-off in oil futures appeared to be slowing, even as world benchmark North Sea Brent crude futures fell below US$50 a barrel for the first time since the financial crisis in 2008.
Brent crude futures fell to a low of $49.66 a barrel during early trading in London, but recovered late in the day UAE time, down 11 cents from the previous close.
Earlier, the benchmark Oman crude futures on the Dubai Mercantile Exchange closed down $2.36 at $47.03 a barrel. The oil market sell-off has been one of the sharpest in history since mid-November as the bearish sentiment that began last summer gathered force.
The overall picture is one of relentless oversupply, with crude supplies rising in North America, output recovering in troubled spots such as Iraq, and a refusal of the world’s core oil exporters – led by Saudi Arabia – to cede market share. All of this coming at a time when economic growth is slowing in key energy-consuming economies, especially China.
But the rate of decline in oil prices has been 5 per cent a week for almost two months, and there is a growing sense in the market that it is led now by speculation and may be becoming overdone.
“If we look at the actual physical Brent Crude oil market in Europe, it is currently around $3 per barrel stronger than the forward futures markets on ICE,” said Tom James, an energy markets expert at Navitas Resources, which has offices in Dubai and Singapore.
“The physical market trading stronger than the forward market would indicate there is demand for the oil – it is going places and the fundamentals are not weak at this point,” he said.
The market has not been focused on the details of the physical crude market, however, as it has become overwhelmed with "technicals" and the selling momentum in the futures market.
As Zacks Investment Research analysts pointed out: “The technical breakdown in crude is mind-blowing. Every potential area of support along the way has been smashed. Now we’re stuck looking at multiyear lows in the hopes of finding something that resembles support. This last push below $50 to kick off the year was a reverse-spinning heel kick to the face.”
Usually, a decline in oil prices is seen as a boon for large swathes of the world economy as it puts money the pocket of, for example, US drivers, many of whom tend to spend it rather than save it. However, the unexpectedly sharp decline in prices since last June has caused worry that it might damage vulnerable economies, including those of Russia and Venezuela, causing collateral damage to a broad range of financial markets.
This, together with declines in stock market values are having a dampening “wealth” effect that could counter any benefits from lower oil prices.
This is one reason it is hard to see a bottom for oil prices even if the selling seems to have gone further than physical market fundamentals might justify.
One factor adding to the current uncertainty is the fact the healthier oil producing countries – including Saudi Arabia and most of its regional neighbours – appear to be content to see oil prices fall in the near term to stymie future investment.
“It is only recently that Brent futures for 2020 have dropped below where they were a year ago,” said Mr Jessop. “This helps to explain the relatively relaxed attitude of wealthier oil producers with ample reserves who can afford to ride out a year or two of much lower prices.”
Still, the market seems to be discounting a pessimistic view of the future rather than the reality of the present.
“You can’t argue with the market price but it certainly seems little to do with actual oil supply demand at this juncture,” Mr James said.
“If I had to predict – if logic prevails – then we should see prices recovering from April onwards.
“My biggest concern with this prediction is the terrible bearish stock markets in Europe for the beginning of 2015. It is not a good indicator of European demand recovery and this will in the end be the thing that drives prices stronger.”
amcauley@thenational.ae
Follow The National's Business section on Twitter
