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Oil flirts with US$30 levels amid bearish outlook (Amended)

Chinese stock market rout and appreciating USD weighing on oil price: analysts
Thursday, January 14, 2016 - 05:50
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Oil prices rebounded on Wednesday after dipping below US$30 a barrel for the first time in 12 years.

Singapore

OIL prices rebounded on Wednesday after dipping below US$30 a barrel for the first time in 12 years. With no supporting factors in sight, however, the oil market is unlikely to get a reprieve for a while, analysts have said.

And if US crude inventory figures released overnight are stronger than expected, the threshold could once again be broken.

Brent crude, the international benchmark, touched a low of US$29.93 a barrel in the morning and then pulled back to US$31.52 at 8pm Singapore time, up 66 cents per cent from the previous close. The US West Texas Intermediate was up 69 cents at US$31.32 a barrel.

Oil-related plays were among the top traded stocks on the Singapore Exchange. Oil-and-gas exploration firms Linc Energy, Loyz Energy, Rex International and rigbuilder Keppel Corporation all gained, cheered by the first rise in the oil price in eight days.

Concerns that the turmoil in the China market would curb demand in the largest energy consumer, coupled with an appreciation in the US dollar, have led the oil price to slide 15 per cent since the start of the year.

OCBC commodities analyst Barnabas Gan said: "The bearish cues we have been seeing since the beginning of the year have been very strong. We haven't seen any bullish news."

The market has been pricing in a possible impact from the stock market rout in China, said Suresh Sivanandam, an analyst at oil consultancy Wood Mackenzie.

Chinese demand for crude oil grew 440,000 barrels a day last year, up from the incremental growth of 370,000 barrels a day in 2013, with low oil prices spurring higher consumption.

Wood Mackenzie is currently expecting incremental demand growth in China to flatten this year at 420,000 barrels a day, but might revise its forecasts if the stock market turmoil continues.

Mr Sivanandam said: "We need to see how much the changes in the stock market could filter through to personal consumption and have an impact on demand. But if this trend continues in the stock market, this figure could be the upper limit and we might end up with a lower demand growth for 2016."

Others are more optimistic, believing that the stock market turmoil will not affect physical demand for oil.

Worries over Chinese growth are not new, said OCBC's Mr Gan. The bank is expecting China to grow 6.7 per cent this year, which he pointed out is "decent".

"The most important thing is that even though the pessimism is around, the demand for crude oil is still there," he said. "It's still present."

Meanwhile, the appreciating US dollar is also weighing on oil prices, analysts said.

Morgan Stanley says oil prices could fall by between 10 and 25 per cent if the US dollar gains 5 per cent.

Non-fundamental factors such as the US dollar have become more important price drivers since last year, it said in a note on Monday.

The bank's analysts, led by Adam Longson, wrote: "In an oversupplied market, there is no intrinsic value for crude oil. The only guide posts are that the ceiling is set by producer hedging, while the floor is set by investor and consumer appetite to buy."

This trading paradigm would probably stay this year, as the oil market remains oversupplied, it added. In view of the continuing appreciation of the US dollar, it is possible that oil prices could fall to as low as US$20 to US$25 a barrel, Morgan Stanley said.

The extended oil slide has rattled producing countries further. Russia said on Wednesday that it will cut its spending by 10 per cent this year, while Nigeria's petroleum resources minister called for an emergency Opec meeting in early March.

Emmanuel Ibe Kachikwu, who is also Opec's president, was reported as having said: "We did say that if it hits the $35 (per barrel level), we will begin to look (at)... an extraordinary meeting."

Even if that were to occur, however, brewing tensions between Saudi Arabia and Iran mean a production cap - which the group did away with in its December meeting - is unlikely to materialise, some believe.

Daniel Ang, an analyst at Phillip Futures, said: "I really don't think an Opec meeting in March will bring much changes to the whole landscape. No curbs to production will be enforced."

Still, the geopolitical tension in Middle East could prove to be a wildcard in its impact.

Mr Gan said: "If you look at history, any kind of geopolitical tension is price-positive."

READ MORE: Oil price recovery: a long way out

Amendment: The article has been revised to reflect OCBC's clarification that it is forecasting China to grow 6.7 per cent this year.

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