Last week was a historic one in energy markets, with WTI and Brent crude barrels falling to $33.37 and $33.95 (respectively), breaking the lows they set during the Financial Crisis. Both benchmarks for black gold fell about 9% over the week, and are at prices unseen since 2004.
- Perhaps the most important financial news from this past week is the turmoil in China’s financial markets. Chinese authorities twice stopped trading after the Shanghai Composite Index dropped 6.9% on Monday and 7% on Thursday. Worries that China’s economy is no longer the powerful force it once was forced other major stock exchanges down. Oil’s weakness is also explained by China’s troubles, as economic problems in the Middle Kingdom could lead to a reduction of its demand for refined products. We will be watching financial and economic data from China closely over the coming months to determine whether this week’s volatility is simply investor panic or truly a sign that the Chinese economy is in hot water.
- The start of the New Year saw the start of a new conflict between oil-producing giants Saudi Arabia and Iran, after Saudi Arabia execution of Nimr al-Nimr, a prominent Shia cleric. After Iranian protestors stormed the Saudi embassy in Tehran, the kingdom cut diplomatic ties with Iran. Iran has since accused Saudi Arabia of firing rockets at its embassy in Yemen. The BBC and Bloomberg are calling this conflict the worst between these two countries in nearly 30 years. Civil wars in Syria and Yemen and the fight against ISIS have already disrupted the region, and this development only worsens a bad situation. If investors believe the Middle East’s many conflicts might threaten its oil production, we may see a “geopolitical risk premium” added to the price of oil.
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- A surprising story to end an interesting first week of 2016: the Saudi state-owned oil firm, Saudi Aramco, might go public. Prince Mohammed bin Salman shocked the world by revealing the kingdom is considering an IPO of one of its prize assets. Saudi Aramco singlehandedly produces more crude than the entire United States, and, according to the Economist, could be worth “trillions of dollars.” If that estimate is correct, it is by far the world’s most valuable company.
- Diesel traded on the NYMEX ended the week under 0.40 CAD/L, about 50 cents lower than the highest price in 2014 and 30 cents lower than the 2015 high. This is only the second time since 2004 we have seen NYMEX diesel trade at this level. Market conditions are looking very favorable for hedging a portion of your fuel consumption for the short- and long-term.
Have a great week!
Philippe Shebib