PARIS (ResourceInvestor.com) -- The oil market is, as usual, performing a strange dance. It has opened the year showing great weakness with little signs of abating. As we mentioned last week this was not unexpected. But what is the most interesting development is that the $54.50-$55 floor price that has been so resilient over the past 18 months has finally been broken.
In recent months, the $55 floor has been tested several times, where it resisted. It was also tested in the run up to Christmas 2005, where it also resisted. Both times the market produced a flurry of short positions, both times the short positions broke previous records, yet $55 stayed put.
However the third time it was too much for the market to bear and after over a year and a half of trying the market has had its back broken. The crude price is down 15% since the start of the year and 2007 is looking increasingly unstable.
So where are we going now and why?
Without some kind of major catastrophe springing itself upon us we are heading lower, with the possibility of a sharp return to the upside. In other words, the price is going to go down, as the market herd are well and truly in the mood to short the price.
Firstly U.S. data, on which the market places so much importance, has turned very bearish in recent weeks. The data showed big increases in distillates and gasoline. Distillates are 12 million barrels, over 9%, up on the same period year on year. Heating oil is 5.7 million barrels, over 10%, up on the same period last year. Crude stocks fell by 5 million barrels last week, to a stockpile of 314 million barrels. This is 6.9 million barrels, 2%, below the same time last year but the market has brushed off the implications.
Basically demand in the U.S. is healthy, but generally flat. This could mean the start of the long awaited economic downturn, the second part of the ‘double dip’ that analysts and the public alike have been speculating about for some time. If so this puts further downward pressure on the price of a barrel of crude. Even a historically weak dollar has not supported the price.
OPEC cuts have been ignored by the market for a couple of reasons. Firstly OPEC are rather opaque when it comes to sticking to their own quotas, secondly the barrels they have cut are the barrels no one was buying anyway. It appears that two of the most aggressive nations, in terms of cutting output, Iran and Venezuela, are two of the worst offenders when it comes to quota breaking.
However the lead has been taken by the mild winters in Europe and America. Swimmers have been out in New York in January, daffodils are blooming in London and sunbathers are sunning themselves in France and Spain. The unseasonable weather, we should be used to it by now, has thrown off the certainties that normally shroud the winter months.
It looks very likely that the market will now test $50 in the near future. It will need some real resolute action by OPEC to boost the price. Or some kind of significant geo-political action.
We may note now that however many hostages are taken by the militant groups, really local men, in the Niger Delta, it has no effect on the price in London or New York. Hostage taking, even fairly sophisticated bombs – a new development for the Delta groups – has come a long way second to the clement weather in terms of market action.
What $50 oil will do to the majors is only just starting to unfold. We can only wonder to what effect this weighed on the mind of BP CEO Lord Browne, who has decided to step down on July 31 this year instead of December 31, 2008.
With the possibility of far lower profits running headlong into far higher industry costs, Browne may well have decided to get out while the profits are still at record highs.
