Saudi Comments See Oil Upside Fizzle

Market Trends - 25/01/2016

After the spectacular short squeeze late last week following the latest US inventory figures, crude oil prices are once again on the retreat as comments from Saudi Aramco point to no new near-term easing of production.  Early in the weekly reopening, price momentum remained to the upside, with the March contract for West Texas Intermediate rising to highs of $32.77 per barrel with Brent reaching $32.80 before correcting back to the downside. Prices got a supplementary push after Baker Hughes reported on past Friday that active oil drill rigs dropped to 510 for the week ending January 22nd, with energy prices further buoyed by winter weather conditions across the US Northeast with expectations of rising demand for heating oil. In spite of forecasts showing that demand is forecast to rise in 2016, the most recent rally back above $30 per barrel is likely to prove brief and moreover a perfect point for speculators to begin reestablishing positions anticipating another leg lower in prices.

Remarks from Saudi Aramco Chairman Khalid Al-Falih point to sustained investment in the Saudi oil patch despite the current period of depressed prices, sparking investor concerns that the market will stay oversupplied with Middle-Eastern producers still pumping at a breakneck pace.  Other troublesome aspects of his observations include shrinking diesel consumption in China which is further evidence of slowdown in the world’s second largest economy.  Diesel demand contracted by -5.60% in 2015 alone according to the latest figures from China, highlighting the ongoing deceleration in industrial output in the region.  Although Saudi Aramco has underlined the point that it can withstand lower oil prices for a “long, long time,” marginal producers have shown tremendous resolve.  Even with the deteriorating price conditions expected to add to cash flow concerns for upstream operations in unconventional oil plays, production remains largely unchanged.  However, the first victim of the price rout may be unintended, with the socialist paradise of Venezuela increasingly on the verge of collapse.


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