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Oil's wild ride continues as volatility rises

Announcements by oil producers in coming months as well as global growth will drive prices
Tuesday, December 2, 2014 - 05:50
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The oil market is now bracing itself for higher volatility as prices struggle to find a floor in the near term, with warnings of yet further downside.

Singapore

THE oil market is now bracing itself for higher volatility as prices struggle to find a floor in the near term, with warnings of yet further downside. (see infographic)

Prices for Brent crude oil continued to slide on Monday, following an already sharp sell-off on Friday, hitting a new four-year low of US$67.53 a barrel before rebounding later in the day.

Volatility is expected to increase in the near term as traders look out for announcements by oil producers in the coming months as well as signs of an uptick in global growth.

For example, potential production cuts in US shale projects could occur. Shale projects in the US require break-even oil prices of US$60-US$80 a barrel, according to Credit Suisse commodity strategist Stefan Graber.

But this threshold could be even higher due to cashflow problems caused by overspending, along with jitters in the high-yield energy credit markets which helped finance smaller producers.

"As a result, changes in output might turn out to be more abrupt than many market observers believe," Mr Graber said.

The Organization of the Petroleum Exporting Countries (Opec) oil producing cartel last Thursday decided to stick to its production ceiling of 30 million barrels a day, despite a supply glut, in a move that was seen to signal that it was relinquishing its role of balancing the market.

Although this had been anticipated as a possible outcome before the meeting took place, the market was still shocked by what was seen as a significant departure from a previous policy of cutting production in periods of oversupply, market observers say.

"Saudi Arabia has given up that role of the swing producer," said Vandana Hari, Asia editorial editor of Platts. "What does this mean going forward? We are in a completely new paradigm as far as oil markets and oil market pricing is concerned."

Victor Shum, vice president at energy consultancy IHS Energy, said that oil price volatility could continue all the way through the next Opec meeting scheduled for June 2015.

The Opec decision is also seen as an attempt to pressure US shale producers, which face higher costs, to give up. Credit Suisse's Mr Graber estimated that prices of about US$70 could result in a moderation of US output growth by up to 500,000 barrels a day.

Meanwhile, lower oil prices are also expected to boost the global economy, the weakness of which partially caused the oil price slump.

Wealth would be shifted from oil exporters to importers, with the fall so far this year providing a US$550 billion windfall for oil importers over a year, equivalent to 0.7 per cent of the global economy, said Nick Kounis, head of macroeconomic research at ABN Amro.

Ms Hari of Platts added that for prices to stop sliding, the market will be watching out for "a sustained cut in output, and a sustained growth in emerging economies".

Many expect that it could take up to the second half of next year, or even 2016, before an equilibrium in oil prices is reached.

This is because of lag effects to supply and demand.

It takes time before a prolonged period of low prices prompt shale oil producers to cut back on production, as well as for the global economy to feel the benefits of lower oil prices, which could then lead to a price recovery as demand picks up.

Singapore stocks fell yesterday, with the benchmark Straits Times Index falling 44.86 points to close at 3,305.64 points as oil and gas plays took a beating. Transport counters Singapore Airlines (SIA) and ComfortDelGro were not spared by the selling, even though they stand to gain from oil's fall, with SIA down 18 cents to S$10.60 and ComfortDelGro down five cents to S$2.55.

However, other Asia-Pacific airline stocks continued rallying. Qantas Airways, Australia's biggest carrier, surged as much as 11 per cent to the highest in more than three years. In Tokyo, both ANA Holdings and Japan Airlines were up 4 per cent.

With inflation expectations falling, government bonds around the world gained, with yields falling to record lows. German 10-year bonds are trading at a 0.7 per cent yield, with US 10-year bonds at 2.16 per cent.

*Post-Opec bloodletting continues for SGX oil stocks

*Malaysia O&G counters slump amid US crude price plunge

*Asia currencies hit new lows on oil slide

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