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Thursday, 21 April 2016
Saudis Cash Flow Troubles Cause $10B Bank Drawdown
Saudi is producing every barrel they possibly can. They will be lucky to hold this level for much longer.
There are some signs that the influence of oil on other assets may be fading…. Here’s a number to focus on: $50. That’s per barrel, the price of Brent crude oil at which falling prices started to hurt rather than help shares and other risky assets. Monday’s 6% fall and rebound in oil pushed equities down and back up, once again demonstrating its importance. Brent prices rose 2.6% to $44.03 Tuesday, well within sight of $50. Despite the obvious impact on Monday, there are some signs that the influence of oil on other assets may be fading. If the price keeps going up, the question is not only whether it will carry on, but whether more expensive oil will continue to be good news for shares. The answer depends to a large extent on the explanation for why the link was so tight to begin with. Wind back to […]
Crude oil storage helped commodity traders and refiners make strong profits last year and in the first quarter of 2016 but now the price structure which made it possible is evaporating. In a typical storage strategy, known as “cash and carry”, traders buy physical crude and put it into storage in a tank farm, or more rarely on a tanker at sea. Traders simultaneously sell crude futures for a nearby contract, hedging their exposure in case prices fall while the oil is stored. As the futures contracts near expiry, traders buy them back and sell more contracts for a date further in the future. The strategy continues until the trader is ready to release the stocks back to the market. But the strategy only works if the futures market trades in contango, with contracts near expiry […]
The bullish camp, which includes Opec and EIA, has recently reinforced their $80/bbl target by 2020 based mainly on “battle for supply” (competition among oil producing nations and technologies) arguing that low prices will result in postponed or cancelled investments and permanent loss of production capacity, which combined with their optimistic outlook for oil demand, would allow the cartel to regain control and sustain high prices.
The bearish camp believes in “lower for longer”, below the current spot, and much lower than the $50/bbl currently implied by the 2020 futures. The bearish view acknowledges the “battle for supply”, not only for crude oil but also for natural gas, as well as the “battle for demand” (competition among fuels) where refined oil products (such as gasoline, diesel or jet fuel) compete for market share in transportation demand with alternative energy sources and technologies (such as natural gas, renewables, electricity or batteries); a dramatic change that would erode the cartel’s oligopolistic power.
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