The big question after oil soaring by nearly 10 pct is that did the dead cat bounce ? If we do some soul searching and analyze the trend.

The economics has not changed. In fact Oil Traders/Investors were looking for factors to book profit/short covering. This is what has caused everyone to jump into the bandwagon.
Markets have been looking for reasons to cover their short positions. It was Mario Draghi’s Dovish stance last week that initiated the current up move in hope that ECB stimulus will provide market much needed liquidity.
I am not willing to buy this theory, as ECB data suggest that so far purpose of fund injection has been to support Bank Capitalization and was not meant for Corporate Sector growth. This is why Europe is still struggling to improve is overall economic condition and to create more jobs.
The chaotic immigrant problem in Europe is another cause of concern for the European Central Bank that requires funding. So this argument of fresh ECB stimulus does not carry enough weight, as it is unlikely to stoke demand for industrial or manufacturing sector unless sizable injection is made for the purpose.
Technically it was due to short covering that pushed prices higher. But two other major factors that pushed oil prices higher is fall in OPEC’s Oil output that dipped by 130.000 barrels a day in December because of lowering of output by Saudi Arabia, Nigeria and Iraq.
Blizzard in East Coast is another major cause price hike, as cold weather is likely to increase the overall consumption of heating fuels that has earlier pushed Diesel futures higher. Anyways, poor weather condition is temporary and passing of cold weather will quickly shift sentiment, as demand will be reduced.
In all probability, this trend is not sustainable and will be short lived, as Global inventories have almost reached the maximum levels. Iran has already indicated that it could export nearly One Million barrels of Oil to Europe as early as February, which means supply will exceed demand.
In its latest tweak, IMF has already cautioned of China slowdown that will probably drag Global growth, which is a warning sign to all oil producers that demand should ease.  Therefore, unless oil supply is reduced, in all probability, seller will soon jump in to offer unduly high discounted price to counter best offers. Hence, this rally will exhaust, as Oil will struggle to penetrate beyond USD 35-40 levels and is likely to test new lows.
(Disclaimer applies in my post, which means that the perspective is my personal view. I have made every effort to ensure accuracy of information provided. However, accuracy cannot be guaranteed. This article is strictly for information and not intended for Trade or Business Transaction) 

Crazy Pakistani Predicted Oil $ 25 in 2014 !

In recent months we often read and watch on Tv, banks/economist/analysts, almost everyone predicting Oil to test $ 20-25 levels.

On October 29 2014, when oil was trading @ $ 85, I called for Oil collapse that appeared in Business Recorder  “What would $ 25 Drop in Oil Price Mean for Global Economy”,$25-drop-in-oil-price-mean-for-the-global-economy.html

There were quite a few eye borrows raised in international market, as lot of people may have thought I am a crazy Pakistani calling for $ 25 per barrel. I knew I was documenting a very bold call, but I had enough reasoning to believe in myself, as I was confident of my analytical skills. Apart from Shale Oil, I had also identified 3-other major factors, China trouble, European and Japanese slowdown that would cause blow to the oil producers.

Thereafter, in later weeks and months I kept on explaining that why oil prices will keep on sliding. In my last forecast, I have lowered my target to $ 18.

In 2016, the big question is that what is the future oil trend from current levels ? Below $ 30, Oil has entered in a very tricky zone and producers/cartels are required to be very watchful before they make their next move.

The tug of war is between US Shale Oil producer, OPEC and Russia, which looks helpless for now and hence is a silent spectator/participant. Importantly, combining all three, they produce 53 pct of the global oil and are considered major players.

I think USA would not mind oil prices sliding down to even $ 10, because with its current production levels, it still has to import oil nearly 5 million barrels per day and based on $ 50 price variance, it will enjoy $ 7.5 Billion monthly savings its monthly average trade deficit is nearly $ 43 Billion. So either way it’s a win-win situation for USA, though Shale Oil producers may desperately want oil prices to rise.

However, for Oil Dependent Economies, lower oil prices involve two types of risks. It adds extreme pressure, as they largely depend on its oil sales and are faced with deficit and secondly it still posses threat of losing business to USA that has lifted ban on oil exports, as it is aggressively looking to explore new avenues in European and Asian Market.

Iran could be the spoiler after the lifting of sanctions and will adopt offensive stance to grab its lost market share.

One should not overlook that there is lot of politics involved in oil and there is more politics to come after lifting of Iran sanction. Neither am I discarding Russia as a key player.

Another major event next week is Pakistani Prime Minister’s visit along with the Army Chief (COAS) to Saudi Arabia and then to Iran. Pakistan has so far stayed neutral and can play vital role as a negotiator to calm down the situation.

If Saudi Arabia and Iran are able to cool down the temperature, it can along with Russia lift oil prices by devising a strategy. Current oil prices are not sustainable for Iran’s economy, nor is it helping OPEC oil producers, which are too dependent on its oil exports. Russia too is suffering from sanctions is in conflict with Turkey and is faced with extreme conditions.

Imagine closure and increase in US Oil Rigs Count or weekly Petroleum Data that brings sharp moves in oil prices. Then what wonders a planed strategy to gradually announce slash in production in advance can do lift prices.

Planned strategy to cut oil supply by 5 pct to 10 pct would upset the Bears. Though exceedingly difficult to compromise, as both the countries are required concede to get back to their earlier position, but this is opportune time to reach some sort of understanding.

Being a Muslim country, Pakistani’s can play the lead role as a mediator. Both Saudi Arabia and Iran has to understand that they cannot afford war and neither prolong with a Proxy war.

Based on 53 Million Barrels a day $ 30 price variance would mean the Oil trio would pocket $ 522 Billion annually. To think oil reaching $ 100 barrels again is a dream at time when, the world is exploring all possibilities to increase its fuel efficiency, by means of extraction of hydrocarbon from earth and next in pipeline is Digital Manufacturing Revolution. Before they get too late to decide, both the countries should sense the urgency.

Let better sense prevail, as Pakistani PM Nawaz Sharif & Army Chief Raheel Sharif can act as a bridge between the two countries.

(Disclaimer applies in my post, which means that the perspective is my personal view. I have made every effort to ensure accuracy of information provided. However, accuracy cannot be guaranteed. This article is strictly for information and not intended for Trade or Business Transaction) 


“Business Recorder” By: ASAD RIZVI   Published on October 29, 2014

I think the maths is very simple when IMF makes a frequent downward revision of global growth and IEA sees a reduction in oil demand then there is no reason to believe that oil prices will make gains in such adverse conditions. China is no more enjoying a 10 percent growth rate that it enjoyed for over last two decades. Growth in its housing sector has slowed down badly. Demand for steel from China is another indicator that its construction business is weak.

In August this year Chinese central bank was forced to inject liquidity to support its domestic banking system in local currency in equivalent of nearly three and half billion US dollars. Recent announcement from China says that its reserves are down for the first time since 1996 by USD 100 billion to 3.89 trillion. It all suggests that China has been the global growth engine, that engaged the world economies in vender financing, as Western economies could only manage to survive through liquidity injection, which is a Japanese recipe known as Quantitative Easing (QE) or else the world economies would have collapsed long ago.

In recent years, despite Fed injecting trillions of US dollars in the name of Quantitative Easing (QE), the funds did not help new businesses to flourish, though its balance expanded substantially to a record size, as most of the money was meant/spent for capital injection to correct balance sheets and plug holes. Fund managers were also the beneficiaries as they were also blessed with QE money.

Europe is once again in trouble and ECB has announced that it will be injecting funds through QE. The purpose is not to support business activity, instead banks having weak balance sheets will be blessed with this money, which means more trouble in future.

This is why during all these years no major growth was seen in the developed countries and hence, growth in corporate sector remained subdued. Basically, it’s a number adjustment game in the absence of genuine growth. Injection of money (QE) is not meant for economic stimulation, it is only to cater to financially-crippled books so that holes can be plugged to carry business as usual.

Coming back to oil, if we look at the overall geo-political conditions, in present times things are pretty calm, as Ukraine is a political scapegoat for face-saving purpose. The Iran issue, too, has quietened internationally to a greater extent, giving breathing space to Iran. The Syrian conflict has a different angle and has more to do with oil and gas pipeline/supply that had Middle Eastern (Saudi and Qatari) interest linking with Europe. But Russia for its own survival/interest that exports gas worth over USD 400 billion annually to Europe was the spoiler of the game and so far business is as usual, as the conflict may not have a spillover effect.

If we look from the oil producing countries’ perspective, increase in shale oil production is bad news and is a matter of grave concern for the rich oil producing nations. In August 2013 Prince al-Waleed bin Talal, the billionaire Saudi investor warned Saudis, with an open letter arguing the US shale gas revolution threatened its economy.

So here is an opportunity for the oil producing countries to control oil prices, when the world is not faced with a major geo-political problem. It is estimated that to be profitable shale price needs to be somewhere around $90-100, if correct, then is this not the best time to keep oil prices low and under control.

If we look at the foreign exchange reserves and investment of all the major oil producing countries, they are comfortably placed. Some of them may be carrying debt in their books and some may have to adjust their budgets, but is it not worth taking a chance at a time when the oil producing countries have a good grip on the market. They can certainly make adjustments in their next budget, rather than getting caught trapped at an odd time. Therefore, I do not see any reason for oil to make new high in near or medium-term and instead oil could lose another $20-25, which may not be very surprising unless there is another global unrest in the making.

However, for the cash-strapped world economies that have a daily requirement of 95 million barrels, a USD 30 drop annually would mean that the world will be deprived of USD 1.04 trillion cash money. This is huge amount of money and even a slash of half the amount is good enough to give jitters to the world economy. Since June, Brent oil has lost 26 pct of its value against the high of USD 115 and is currently trading at USD 85 per barrel and oil prices are still under selling pressure.

Another area that could have an adverse impact on the world economies is the foreign remittances, which is nearly USD 500 billion annually. There is every possibility that if oil prices do not recover, it will depress oil producing economies. They will have to cut their development plans resulting in slowdown in business and job losses. This will lead to a drop in remittances by nearly 10-20 percent, depending on the size of a budget cut. In such a situation many countries could face a balance of payment problem, as current account position could deteriorate.

(The view expressed in this article are not necessarily those of the newspaper)

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