Falling Oil prices

The following article is based on my own interpretation of the said events. Any material borrowed from published and unpublished sources has been appropriately referenced. I will bear the sole responsibility for anything that is found to have been copied or misappropriated or misrepresented in the following post.

Basant Gupta, MBA 2015-17, Vinod Gupta School of Management, IIT Kharagpur

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Oil prices fell on Monday as the chances of Middle East producers agreeing to curb overproduction appeared to fade, while stubbornly high US output and worries about Asia’s economic outlook also dragged on prices.

While some analysts expect a recent weakening of the US dollar to spur demand for oil from importers holding other currencies, Morgan Stanley said “negative oil headlines, producer hedging at higher prices and bloated inventories” indicate any upside in prices will be limited. Front month US crude futures were at $36.36 per barrel at 05.20am GMT, down 1.17% or 43 cents from their last settlement. Brent crude was down 1% or 40 cents at $38.27 a barrel. The benchmarks shed 2-4% on Friday when Saudi Arabia said it would only participate in a global freeze of its output if its rival Iran also took part, something Tehran has so far dismissed.

Adding to concerns of a global glut, which has pulled down oil prices by as much as 70% since 2014, US production has remained high despite steep cuts in drilling for new reserves as well as a jump in bankruptcies. “The U.S. oil rig count dropped further this week, with a total 10 rigs idled,” Goldman Sachs said. “The current rig count implies U.S. production … would decrease by 705,000 barrels per day yoy (year-on-year) on average in 2016, and by 375,000 barrels per day yoy in 2017,” it added.

So far, US production remains stubbornly high, at over 9 million barrels per day, as operators keep their oil wells gushing in a struggle to service debt and stay alive. Given a growing belief that prices might not recover by much any time soon, hedge funds have cut their net long positions in US crude for the first time in six weeks. Despite a pick-up in recent economic data, including from India and China, analysts also poured cold water on hopes that Asia’s economic prospects were improving.

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