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WCU: Selling fatigue and Draghi save the day for oil

26 January 2016 [19:21] - TODAY.AZ

By Ole Hansen, Head of Commodity Strategy / Saxo Bank

Crude oil touched a new multi-year low at the beginning of the last week as it was weighed down by the removal of the Iran sanctions and the "drowning in oil" comment from the IEA. The bounce – when it came courtesy of European Central Bank chief Mario Draghi's continued focus on stimulus and winter storms in the US – was aggressive, with Brent crude oil rallying by more than 15% within 24 hours.

Negative oil fundamentals remain and until we see clear signs of the oversupply being capped, the upside at this stage remains limited. While Draghi provided the spark the aggressive reaction was driven by an oversold market carrying an overextended short position.

Confirmation that sanctions against Iran had been lifted helped send crude oil down to the lowest level in 13 years. The focus on rising supply at a time where demand growth is being called into question have been the two main driver behind the extreme weakness seen since the failed Opec meeting on December 4 last year.

This was brought home by the International Energy Agency (IEA) which in its monthly report said that the world could find itself "drowning in oil" this year as rising Opec supply, not least from Iran, would not be met in time by falling production elsewhere. With 2016 becoming the third consecutive year with overproduction, the IEA did not rule out that the price could go even lower.

Nothing ever goes in a straight line forever and as the week wore on selling fatigue began to emerge. The combination of colder weather in the US, talk about additional stimulus from the European Central Bank and a better than expected US inventory report all helped trigger a major rally by the end of the week.

Money managers and hedge funds earlier this month had accumulated the biggest short position ever seen. At almost 400 million barrels combined in Brent and WTI crude the market was increasingly exposed to a sharp reversal. Last time the short became too extended was last August and back then it triggered a 25% rally in just three days.

The near-term outlook remains very challenging as the market has to deal with rising supply from Iran and a seasonal rise in US inventories. Emerging signs of increased stress among high cost producers will increase speculation that a big shake-out is coming in the US shale industry which will ultimately lead to a slow down in production. The IEA is forecasting non-Opec production will fall 600,000 barrels/day in 2016 and this will eventually help offset rising export from Iran.

The head of Saudi Aramco was speaking at the World Economic Forum in Davos this week and he believed that current oil price was irrational and that the market had overshot on the low side. An irrational low price is the response to an irrational high level of production and until the latter is brought down the market can remain irrational longer than oil producers around the world would like to see.

Gold remains a top performer against most assets

Although gold had a relatively quiet week amid all the turmoil elsewhere both metals remain two of the best performers against most other asset classes so far this month. Investors have started to return, not least those using exchange-traded products while hedge funds have returned to neutral from a record net-short position at the beginning of the year.

Two of the major reasons for staying out of gold at the beginning of the year are currently posing less of a threat than just a few weeks ago. The turmoil in global markets have dented the dollar's appeal with traders instead opting for JPY and to a certain extent euros. Worries about a global slowdown and declining inflation due to low oil prices have also reduced the expectations for how aggressive the US Federal Reserve can and will hike interest rates during the coming months.

Our view remains that the combination of a stronger dollar and recovering stocks will continue to pose a challenge to gold during the early parts of 2016. But recent events have highlighted some of golds credentials that had been lost for a while. We may see another attempt to sell gold down towards $1,000 but the improved sentiment and lackluster performances elsewhere will eventually be the driver that takes gold higher later in the year.

/By Trend/

URL: http://www.today.az/news/regions/147096.html

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