The Strategist

Why are oil prices so volatile

11/24/2017 - 04:56

Only one thing can scare the oil market as much as the impulsive tyrants of the Middle East, and these are impulsive hedge fund managers.

For the second time this year, record speculative rates to raise oil prices in American and European futures have made the market vulnerable to a sale.

"No one wants to be the last in line," explains Ole Hansen from Saxo Bank.

November 15, the widely traded futures for Brent crude, which on November 7 set a two-year high of $ 64 per barrel, fell below $ 62. The American West Texas Intermediate (WTI) also went down. The decline coincided with a sharp drop in prices in the metals market, largely due to fears of slowing demand in China. Nervousness of investors was also evidenced by a significant weakening of high-yield corporate bonds. The growth resumed after that, but since then it has alternated with a fall, prices are being quickly adjusted, slightly leaving $ 62 per barrel.

The turn in the oil market, in fact, ended the talks about the increase in prices above $ 70 per barrel, which intensified after the detention of dozens of princes and other representatives of the elite in Saudi Arabia, as well as aggravation of tensions between the Persian Gulf countries and Iran over Yemen and Lebanon.

The International Energy Agency (IEA), which deals with supply and demand forecasts, on November 14, questioned that the price of $ 60 was a "bottom" for oil. At the same time, IEA analysts admitted that geopolitical risk became the dominant factor in the market. Since Iraq reclaimed Kirkuk from the Kurdish forces in October, Iraqi oil supplies have declined sharply.

Hansen believes that the above events added at least $ 10 to the price and this risk premium may disappear as quickly as it appeared, writes the British magazine The Economist.

In addition to geopolitics, two other reasons for volatility should not be forgotten. Since prices have collapsed below $ 30 in early 2016, they are most affected by the intensity of shale production in America, as well as the level of world reserves established by OPEC members and non-OPEC independent producers, such as Russia.

"Bull" oil prices pointed to the fact that shale production is declining and American manufacturers are tightening up their belts.

Wall Street has a lesser desire to finance their expansion, if there is no apparent profit.

Last week, "bears" noticed an increase in the number of drilling rigs (Baker Hughes data), which means that higher prices and additional hedging encourage producers to increase production again.

According to the IEA forecast, shale oil will help the United States become the world leader in the volumes of extraction of "black gold" by 2025. Be that time, Saudi Arabia will be in staking second place, and Russia will move to the third line.

If this is the case, then we have a clear signal for a long-term sale.

As for reserves, then, according to the "bears", the reserves of crude oil and petroleum products in America are still excessive. This puts pressure on OPEC producers and countries that are not part of OPEC. All of them meet in Vienna on November 30 in order to extend the deadline for the reduction of supplies, which ends in March 2018.


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