In Oil & Companies News 15/03/2016
Oil and commodities are said to be among the drivers of the current stockmarket rally. Against the run-up in commodities, the outlook is not all positive for a sustained uptrend in their prices.
Pointing to the world economy, analysts view it is too weak for this commodities rally to be sustained.
However, the current situation is that enough traders are positioning for a rebound in crude oil prices to make this a strong rally and one that can last a while, said Pong Teng Siew, head of research, Inter-Pacific Securities.
The last oil market rally in March 2015 ran for 1½ months. This one has not lasted a month yet.
“If we use the oil market slump in 1999 as a guide, the bottoming process took years to complete. When the oil market turned in early 1999, oil had been in a downturn for two years.
“For a guide, this downturn began in mid-2014; mid-2016 may be a good bet and oil traders appear to be positioning for this.
“But there is a big difference this time. China was on the ascendency in 1999; now, China’s economy is hitting the skids,” Pong cautioned.
Going forward, the upside may be limited as the current rally is in recovery from an oversold position and driven by US dollar weakness.
“Some rallies of hard commodities may not be sustainable as underlying demand is still soft,” said Vincent Khoo, head of research, UOBKayhian.
In fact, global markets could be volatile in the next few days, given the central bank meetings until March 16.
“After that, if markets retrace modestly, we may see a rally until the end of the month,” said Chris Eng, head of research, Etiqa Insurance & Takaful.
Commodities, especially crude oil, may remain volatile in the next few months as there is no clear sign of consumption recovery.
“That said, there is a chance for a more positive trend in the longer run and potentially a black swan of strong rally in oil price when the glut subsides and demand recovers. This is when many oil producers have cut their capital investment.
“As for crude palm oil, prices may stay at this level or higher for two to three months due to drought,” said Danny Wong, CEO of Areca Capital.
There are reasons to be cautious about the current oil price strength as the fundamental picture behind this rally has not been convincing to support a firm turnaround, said independent economisty Lee Heng Guie.
> The oversupply condition in oil is still persisting amid some tentative signs of easing production. The number of active rigs in the US has fallen to a 17-year low, suggesting that overall output of 9.1 million barrels per day (bpd) currently will fall by 100,000 in April.
> There are strong indications that Iran’s insistence of not holding its supply at the January level and its intention to add one million bpd could destabilise the oil production freeze accord reached between Saudi Arabia and its regional rivals.
> Adding to that, a strong rebound in oil price would drive both the Organisation of the Petroleum Exporting Countries (Opec) and non-Opec producers to disband the deal to freeze production, especially for those countries that are cash-trapped to plug their burgeoning budget deficit.
On the demand side, the weakening China economy also does not bode well for any oil price uptrend.
Expressing caution on the oil price uptrend, Suhaimi Illias, group chief economist, Maybank Investment Bank, noted that so far this year, the trend in oil price had been similar to that in the same period last year. This was where oil price rebounded off the lows to rally until mid-year, only to weaken again afterwards.
Opec and Russia have still not held actual talks on output freeze; they have just been talking about it only. In any case, the oil market needs to see an output cut rather than output freeze to address the oversupply problem.
“Oil output is still growing despite it being the third year of capital expenditure cuts in the industry.
“The global growth picture, which in turn, reflects the demand for oil, does not look great when the Bank of Japan adopted a negative interest rate policy and the European Central Bank went deeper into negative interest rates and quantitative easing while the US interest rate hike outlook diminishes and China resumes cutting its reserve requirement.
“The only reason for commodities to surprise on the upside is ‘money looking for returns and yields’ amid low, falling and even negative interest rates,” said Suhaimi.
The latest to call a bottom in oil price is the International Energy Agency (IEA) which cited factors such as output in the United States and other non-Opec producers beginning to fall quickly and an increase in supply from Iran having been less than dramatic.
The agency’s view on prices is a shift from last month’s report, in which it said that crude could sink further as the market remained “awash in oil”, noted Bloomberg.
Besides the IEA, several people have tried to call for a floor in oil price since prices started falling in the summer of 2014. So far nobody has been right, said Bloomberg.
In November 2014, Harold Hamm, CEO of Continental Resources had called for a bottom in oil price when it was around US$80 per barrel.
In January 2015, renowned oil trader Andy Hall who runs Astenbeck Capital Management, had made his call when West Texas Intermediate oil, the US benchmark, fell below US$50 a barrel this week for the first time in more than five years.
In April 2015, Vitol’s Ian Taylor said oil price at around US$65 per barrel had hit bottom.
In the same month, JP Morgan made its call when oil was around US$57 per barrel.
By October last year, oil price had fallen to around US$50 per barrel, and Qatar predicted oil price would rebound this year.
The present call by the IEA occurs at oil price hovering around US$40 per barrel.
It is truly hard to catch a falling knife!
Columnist Yap Leng Kuen reckons it is difficult to predict prices when a potpourri of forces are at work.
Source: The Star
