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PM Bulletin: Gold
29 Jan 2016
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29 Jan 2016
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28 Jan 2016
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28 Jan 2016
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27 Jan 2016
AM Bulletin: Crude still driving equities
27 Jan 2016
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26 Jan 2016
AM Bulletin: Equities slide on crude sell-off
26 Jan 2016
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25 Jan 2016
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25 Jan 2016
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22 Jan 2016
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22 Jan 2016
PM Bulletin: Dovish Draghi triggers euro sell-off
21 Jan 2016
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21 Jan 2016
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20 Jan 2016
AM Bulletin: Stocks slide as oil slumps
20 Jan 2016
PM Bulletin: Bank of Canada rate decision
19 Jan 2016
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19 Jan 2016
PM Bulletin: Crude oil - long-term charts
18 Jan 2016
Weekly Bulletin: China and oil weigh on equities
18 Jan 2016
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15 Jan 2016
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15 Jan 2016
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14 Jan 2016
PM Bulletin: Equities: bull or bear?
14 Jan 2016
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14 Jan 2016
PM Bulletin: The Bank’s rate decision
13 Jan 2016
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13 Jan 2016
PM Bulletin: Saudi Aramco’s IPO
12 Jan 2016
AM Bulletin: Crude closes in on $30
12 Jan 2016
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11 Jan 2016
Weekly Bulletin: 2016: Trouble ahead?
11 Jan 2016
January: Non Farm Payrolls Out Today
08 Jan 2016
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08 Jan 2016
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08 Jan 2016
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07 Jan 2016
AM Bulletin: Equities slump after 2nd China trading halt
07 Jan 2016
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06 Jan 2016
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05 Jan 2016
AM Bulletin: Chinese equities plunge
04 Jan 2016
 
 
 

 

Another day brings another fresh multi-year low for the price of crude. Yesterday oil popped higher and there were hopes that the protracted sell-off that began in the summer of 2014 may be coming to an end. After all, the US dollar (as measured by the Dollar Index) is off its highs and appears to be levelling out. Of course this could prove to be consolidation ahead of another leg up. However, it’s quite possible that the current ructions in financial markets may lead the US Federal Reserve to dial back its projections for a further 100 basis points-worth of rate hikes over the course of this year. If so, then one of the supports for a stronger dollar (and weaker oil prices) would be removed.

Since Goldman Sachs suggested the (outside) possibility of $20 oil back in September, it feels as if there’s been a competition to undercut their apparently egregious prediction. The lowest I’ve seen so far is $10 per barrel from Morgan Stanley and Standard Chartered. And why not?  As Keynes said: “Markets can remain irrational a lot longer than you and I can remain solvent."

But while markets gather their own momentum and can overshoot to the downside as well as the upside, it’s difficult to know how much more bad news there could possibly be for crude. We know about the supply glut. OPEC (responsible for around 40% of the world’s daily requirement) is producing anywhere between 1 and 2 million barrels per day (bpd) more than its old (now abandoned) output ceiling. Iran is back in play and is set to add around 500,000 bpd to this. Non-OPEC supply has also held up well, although according to the latest outlook from the International Energy Agency (IEA) which was released yesterday, this is set to decline in the second half of this year.

In addition the IEA left its estimate of growth in global demand for 2016 unchanged from its previous monthly report at around 1.2 million bpd. The agency warned that “the oil market could drown in over-supply. So the answer to our question is an emphatic yes. It could go lower.” The IEA concluded: “…that the oil market faces the prospect of a third successive year when supply will exceed demand by 1 million bpd and there will be enormous strain on the ability of the oil system to absorb it efficiently.”

There is another concern which has been highlighted by Jim Rickards a writer, editor, lawyer, economist, and investment banker with 35 years of experience working in capital markets on Wall Street. He predicts that the end is in sight for the Saudi riyal’s peg to the US dollar – something that has been in place since the mid-1970s and a vital part of the US/Saudi petrodollar deal.

Mr Rickards notes: “The strong dollar and low price of oil is strangling the Saudi economy and causing a drain on Saudi reserves. At current rates of capital flight, Saudi Arabia will soon be broke with nothing left except low-priced oil that no one wants”. A break of the peg would mean a sudden devaluation of the Saudi riyal, send crude lower and cause all kinds of market disruption. Expect crude prices to remain under pressure for as long as this threat remains. 

Disclaimer:

Spread Co is an execution only service provider. The material on this page is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by Spread Co Ltd or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

 

Posted by David Morrison

Tagged: Bulletin PM

Category: PM Bulletin


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