Outlook Remains Muted For Oil, Base Metals

December 17th, 2015 by

oil_rig2There’s little reason to believe that crude oil is on its way higher any time soon. This is especially true in light of developments in both the U.S. and the Middle East. Crude prices were down again on Thursday afternoon, with West Texas Intermediate (WTI) falling below $35 per barrel and Brent crude holding just above $37 per barrel.

No Cuts to Output

One of the key drivers to the absent recovery in crude oil prices is OPEC. Specifically, the cartel’s decision not to cut its production of oil is looming large. Saudi Arabia was met with deafening silence when it recently called on its fellow OPEC members, as well as other non-OPEC countries who produce substantial amounts of oil, to cut their output in order to support higher oil prices.

Saudi Arabia is wary of cutting its own production without assurances that others will follow suit. Last time the kingdom decided to curb its oil output, it was surprised to see the missing production made up for by other countries. This ate into the Saudi’s market share in the global oil trade.

Saudi Oil productionIn fact, Saudi Arabia is now on track to increase its crude oil output, placing more downward pressure on prices. The hope is that other competitors will be forced out of the market by such low commodity prices. On top of that, Iran has been pumping 2.8 million barrels per day since last month; this supply is expected to hit the open market during January.

Due to these developments, the net short positions in crude futures are rising. On the other side of the bet, net long positions are at fresh 5-year lows. This is part of why Goldman Sachs has repeated its call for oil to fall to $20 per barrel before any recovery will be seen.

Pivot to Asia

Another part of Saudi Arabia’s strategy is to increase its presence in the growing Asian market. With crude prices so low, the Saudi government has bought up majority stakes in refineries located in Asian countries. In addition to venturing into the refining side of the business, the kingdom has also been securing deals to sell their crude and refined oil to these nations. They have plans to expand into Japan, South Korea, Vietnam, and Indonesia.

oil marketWhile it is also obviously targeting China, the world’s second-largest consumer of petroleum, Saudi Arabia must compete there with Iraq, Angola, and especially Russia.

China, however, “will suspend fuel price cuts while crude continues to fall in order to slow consumption growth and trim automobile emissions,” according to Bloomberg. With demand for oil and gas rapidly growing in China, the government is hoping to curb runaway demand to support prices for domestic producers. Analysis shows that the Chinese are not willing to see oil drop much below $38 per barrel.

 

Crucial Decision by Congress

Another bearish development for crude oil is the spending legislation being debated in the U.S. Congress at the moment. It is expected that the spending bill will pass with a clause that lifts the four-decade ban on the U.S. exporting oil. This policy was developed in the 1970s amid an oil crisis.

oil-tankerWhile this measure will help pay for the new spending authorized by the bill, and is supposed to be offset in some sense by the extension of solar and wind energy tax credits, the addition of new exports from the United States onto the global oil market will only place more downward pressure on crude prices.

Industrial Metals Follow

Another development that is largely being driven by the Chinese economy is the similar downward slide for the base metals. Industrial metals like zinc and copper have continued to see their prices bleed; the latter lost 1.2% on Tuesday, while the former fell by 1.6%. Iron has likewise been mired in a slump. As China’s economy—the manufacturing hub for the world—sees slowing demand for factory production, the market for industrial metals will continue to suffer.

 

The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.