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Why Oil Prices will not surpass $ 60-65

July 16, 2016

In my April 10 2016, Linkedin note “Future of GCC Economies” https://asadcmka.wordpress.com/2016/04/10/future-of-gcc-economies/

Then oil was hovering around $ 50. I wrote that in coming months there is a real threat of another sharp drop of oil prices. I strongly believe that oil will struggle to surpass $ 60-65 levels in near to medium term due to quite a few unfavorable factors, unless supplies get interrupted.
We are already witnessing supply glut and oil rig count has certainly bottomed out as the rig count is up by 41 in last seven weeks.

While, market has yet not taken into account the impact of Britain’s exit from European Union, though it is too early to make a judgment, but it will initially it will complicate UK growth trend.

Therefore, one thing is for sure, it will not help the cause and slowdown in Europe after Britain’s decision to leave EU will be unavoidable that would lead to more vulnerable global economic condition, probably a move towards recession will happen, as in all probability separation will spill over and would exhaust global economy.
Meanwhile, in 2nd quarter China’s economy grew at a slightly better rate by 6.7 pct though at 7-year low. Unfortunately, growth in China is not led by investment, which means state is injecting liquidity and deficit will rise.

We could see couple of more bounce back before exhausting, as government cannot keep on dumping money. This type of support/trend is not sustainable unless required structural changes are made.
Such type of forced stimulation package has many cost factors, as Its Central Bank, Peoples Bank of China has to easy policy rate to provide cheap funding. It has to lift or loosen restriction in banking sector, which is why in the month of May bank lending has jumped from USD 150 Billion to USD 210 Billion or Yuan 1.4 Trillion.

This means in all probability global economic slowdown has no stopping and unless supply gets choked, oil glut will remain a problem, as supply should exceed demand.

(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)

 

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