Brent Benchmarks Officially Bearish

Market Trends - 28/07/2015

The volatility of oil earlier this year took the commodity through both a steep dive and an astounding recovery, and in an echo of the former, the Brent oil benchmark has yet again entered into official bear market territory. This event is defined by economists as a 20% drop from previous highs, and comes amid unsurprising news of record closings of long oil positions from the CFTC. Hedge funds are also seeking to rid their portfolios of other commodities like precious metals, as oil is not the only asset currently unable to weather a period of deflation. Major economies have so far been able to avoid these pressures, and in the case of the UK have even posted second quarter GDP gains while the US is expected to report growth in their report on Thursday. These morsels of good news come in the middle of global concerns that could serve to reverse or decelerate expansion, such as the quickly expanding economic issues facing China and Japan, and the pain felt in Australia over low commodity prices.

There is no single guilty catalyst to the weakness seen in oil. Among other factors, speculation in the futures market and price competition among major producers have all resulted in the figures we are witnessing in today’s Brent. A signal of difficulties to come is the decreasing distance between Brent’s spreads and the spreads of the WTI, two benchmarks that have not witnessed a distance this narrow since the last significant price tumble. The steadily increasing supply and capacity are also worrisome signals to another round of price weakness. Equilibrium is most likely lower than today’s prices, especially given the ramp-up of OPEC and US production and the stagnant global demand for oil. A reasonable balance might be around the $35-40 per barrel level, as volatility and a poor global economic environment weigh heavily on the shoulders of the industry. A drop to $20-25 per barrel is still doubtful.


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