In late July, I posted an article titled “Oil: premature weakness.” Now it’s time to go back to analyzing this issue.
In the July post, I predicted the fall of Brent crude oil quotes to $ 50, and the WTI oil down to $ 40 per barrel. Again, it must be noted that this forecast came true earlier than expected. The US WTI oil has already visited below $ 38 and Brent blend has hit January lows and fell below $ 42 a barrel. We did not even have to wait till the end of the summer season with its high demand for gasoline!
What are the reasons for such rapid and seemingly premature weakening?
- First, it is the reduction of the number of working rigs in the United States. According to Baker Hughes Inc. reports, the number of operating rigs had been increasing for four of the last five weeks and within a week it remained unchanged. These data show, that expectations that the fall in oil would lead to sharp cuts in oil shale in the United States, may prove to be wrong, and therefore, excess supply of hydrocarbons will preserve.
- Secondly, latest forecasts of the largest banks played the role too, which one after another release reports, expecting further downtrend in oil next year. On August 7, J.P. Morgan analysts published a forecast saying that average price for Brent crude in 2016 will amount to $ 52.5 per barrel versus $ 54.5 in 2015, and the average for WTI is expected to be around $ 46.5 against the previous $ 48.5. The revision of the J.P. Morgan’s forecast for 2016 was very sharp – $ 19 down for each brand.
- The third reason (and certainly the most important) is fears concerning the prospects of China’s economy. Everybody understand that China is the second largest consumer and the first world’s largest oil importer. And if the demand for oil from China falls in the face of slowing economic growth, the imbalance in the global hydrocarbon market will become even stronger. That’s why every weak report from China shakes the market prices for oil. Particularly strong effect is observed now, when the air is saturated with a premonition of a new global economic crisis, caused by a “hard landing” of China’s economy.
Some predict that oil prices will soon fall to $ 30 per barrel. However, I am inclined to believe that the downtrend this year is almost exhausted. I expect the black gold to find its “bottom” around winter 2008/2009 lows …
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