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Matt Smith

Matt Smith

Taking a voyage across the world of energy with ClipperData’s Director of Commodity Research. Follow on Twitter @ClipperData, @mattvsmith01

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Petro States Dipping Into Coffers As Oil Price Reality Kicks In

Fifty-two years after Johnny Cash’s “Ring of Fire” became the first country album to top the US pop album chart, and the crude complex is stuck in a vicious circle once more.

We have nada-nothing-nil on the economic data front today, as is the way after the first-week-of-the-month-economic-data deluge, although Q4 earning season kicks off after hours today with Alcoa up first, as usual. It won’t be until next week, however, when we really get into the full swing of things on the earnings front.

China’s equity market continues to have a torrid time of it, selling off a further 5.3 percent to start the new week. While European and U.S. equities are looking less ruffled by this news, the crude complex is being dragged lower once again – stuck in a tractor beam, being pulled toward the $30 level it would seem. Gasoline is trying to buck the trend, pushing higher after last week’s inventory report-sponsored plunge. Related: Statoil CEO: Expect Volatility Now, Price Spike Soon

The chart below is from Capital Economics, and it addresses the current issue of Chinese economic weakness.

(Click to enlarge)

The key point they are expressing (via Twitter) is that although China’s financial markets may be in turmoil, their economic indicators for the most part haven’t shown deterioration since the equity market peaked mid-last year:

While oversupply has been a key driver behind the oil market crash over the last eighteen months, another huge influence has been a strengthening US dollar. Hence, regardless of oil market fundamentals, if you think the U.S. dollar is going to continue strengthening this year, then you have to think that oil prices will continue to trundle lower. (Morgan Stanley do). Related: Rig Count: Capitulation?

Just a quick glimpse along the forward curve serves as an endorsement for the ‘lower for longer‘ mantra that swirls like a sand storm round the current crude complex. The December 2016 contract is fast approaching a test of $40, while you have to go out to 2020 to see a price above $50. The furthest you can go out on the futures curve is 2024, and even then prices do not break $54. That certainly is lower for longer.

While the financial fragility of Saudi Arabia is very much under scrutiny, sending its equity market ripping lower once more, dipping into coffers is a common theme across petro-states. Kazakhstan’s national oil fund is down nearly 17 percent from its peak, as a combination of shrinking revenues due to falling oil price and a government dipping into its savings has drawn it down by $13 billion. Saudi Arabia has seen its reserves fall by a similar percentage, down 14 percent to $635 billion in November versus the prior year. Related: Why The U.S. Can’t Be Called A ‘Swing Producer’

Today we get the EIA’s drilling productivity report, likely showing ongoing downside from Eagle Ford production, while the Permian Basin stubbornly holds its ground. Tomorrow sees the EIA’s monthly Short Term Energy Outlook; we have to wait until next week for the monthly deliverables from OPEC (Monday) and IEA (Tuesday). But for now, oil prices look lower once more.

By Matt Smith

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