Three hundred and seventy-three years after the birth of Sir Isaac Newton, and the crude complex is gravitating higher to start 2016. Newton said that ‘to every action there is always opposed an equal reaction’; this notion is currently absent between Iran and Saudi Arabia, as the execution of a prominent Shiite cleric by Saudi Arabia on Saturday is causing heightened tension and escalating tit-for-tat responses from the two OPEC members.
After the Saudi embassy was attacked in Tehran, the Saudis responded by cutting off diplomatic relations with Iran. The crude complex has accordingly responded by rallying strongly, before being distracted by another lackluster manufacturing print out of China. Gains have been pared, while Bahrain and Sudan have joined Saudi Arabia in cutting off diplomatic relations with Iran, while UAE has ‘downgraded’ relations.
To counter the exchange of barbs betwixt Saudi and Iran, the Chinese PMI manufacturing gauge via Caixin yielded a tenth successive month of contraction for the sector in December, as it dropped to 48.2; below both November’s print of 48.6, and also below consensus of 49.0.
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This prompted a short, sharp, shock to the Chinese stock market, which plummeted 7 percent, triggering circuit breakers……leading to the suspension of operations for the rest of the day. Weak manufacturing data, in combination with the impending lifting of the ban on short-selling at the end of this week, sent a shockwave across Asian markets, to Europe, and finally to the U.S.. Cue a very glum start to 2016 for global equity markets.
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In terms of economic data elsewhere, Japan and the Eurozone saw both expansion and better-than-expected data for its manufacturing PMIs; impressive prints from both Germany and Italy offset disappointing numbers from France and Spain. The corresponding U.S. print is expected to show minor expansion.
Back to the crude complex, and another quote from Isaac Newton’s provides guidance about how to sum up what to expect in 2016: ‘truth is ever to be found in simplicity, and not in the multiplicity and confusion of things’. Hence a quick peek at the fundamentals in the current oil market give us cause for ongoing wariness of rallies. U.S. production, against the odds, continues to hold up, while OPEC members continue to pump apace. Although oil demand growth is set to be less than last year’s rampant pace of over 1.5 million bpd, the imbalance between supply and demand is set to persist for the coming few quarters, despite some moderating of its size.
Flooding in the Midwest in the last week may well exacerbate the glut of crude at the pipeline crossroads of the world – aka, Cushing, Oklahoma. After Enbridge’s Ozark pipeline was halted due to flooding along the Mississippi River, there is 215,000 bpd which is stuck in Cushing, unable to make its way on the pipeline to Wood River in southern Illinois. This coincides with Cushing inventories reaching a record 62.99 million barrels in last week’s EIA petroleum status report – surpassing the record of 62.2 million barrels achieved in mid-April of last year. Related: Is 2016 The Year Of Wind And Solar?
The UK today wins the prize for terrible timing, as the industry body Oil & Gas UK announced today that UK oil and gas production rose in 2015 for the first time in fifteen years, as projects which were started a few years ago (think $100 oil) have come to fruition…as oil hits the $30s.
Finally, 2016 is not just the year of the monkey, but also the year of U.S. energy exports. The lifting of the U.S. oil export ban means that cargoes are starting to leave the U.S. – the first one as of New Year’s Eve – while LNG exports are set to start this month from Sabine Pass. What a difference a decade makes.
By Matt Smith
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