- Brent, WTI crude fall to respective 27- and 17-month lows
- China struggling to maintain growth targets
- Saudi Arabia cuts prices for Asian customers
The energy sector is leading the commodity sector lower today as a potential rising discrepancy between supply and demand continues to attract sellers.
Source: Bloomberg, Saxo Bank
Brent crude oil has reached its lowest level since June 2012 while WTI crude has reached and breached the $90 per barrel level for the first time in 17 months. From worrying about supply on numerous occasions during the past few years, the news lately has primarily been focusing on rising supply from numerous suppliers.
This rise is now hitting a market in which uncertainty about the near-term outlook for economic growth and subsequent demand has been called into question. China, the world's largest importer, is struggling to maintain its growth target of 7.5%, Europe is toying with recession while many South American countries are also witnessing a slowdown, at the moment. The US economy is currently improving but for how long can it go it alone when the world outside is struggling to keep up? And even if the US continues to grow this will most likely not lead to any significant pick up in demand from the world's biggest consumer but also the world's soon-to-be biggest producer of energy.
A Bloomberg survey indicates that OPEC pumped almost 31 million barrels in September, which is the highest for more than a year. Photo: iStock
The latest weakness in both crude oils has been triggered by news that Saudi Arabia, OPEC's biggest producer, has cut its price to Asian customers on its November deliveries by more than the market had expected. This has been taken as a sign that Saudi Arabia is currently unwilling to hand over market share to Iraq and Iran at a time of slowing demand for the cartel's crude oil.
A Bloomberg survey indicates that OPEC pumped almost 31 million barrels in September, which is the highest for more than a year. The rise has primarily been due to the speedy return of oil from Libya but also due to increased production from countries such as Iraq.
As a result, we have seen Brent crude come under increased selling pressure during the past few months and the premium over WTI crude oil has continued to contract. The current oversupply can be seen in the chart below, which tracks the spread between the first and the second futures month in Brent crude. Since June the front of the futures curve has been in contango as the price of spot crude has fallen below that of later delivery months.
As long this oversupply is maintained the upside potential for crude oil is limited and, with the latest news from Saudi Arabia, it will be a challenge for OPEC to agree on any production cuts before or during its next meeting in November.
We should expect the calls for cuts to increase as the price drops and the budget deficit among some of the key producers continues to rise. Not least Russia, which had based its budget on an oil price well above current levels but which so far has seen an offset due to the sharply lower Ruble but also from an increase in production, which rose to 10.6 million barrels in September.