Let it snow, let it snow, let it snow

Author Ben Winkley

It’s a new year, but it’s the same old story in the crude market. The most recent two price slumps bottomed out amid the low liquidity of New Year’s Eve trading, but not even an outbreak of undiplomatic language among the Middle East’s major producers could resuscitate the price as the old year was seen off.

It’s a new year, but it’s the same old story in the crude market. The most recent two price slumps bottomed out amid the low liquidity of New Year’s Eve trading, but not even an outbreak of undiplomatic language among the Middle East’s major producers could resuscitate the price as the old year was seen off.

Brent’s dramatic slide from its record highs in 2008 ended as that year did; the continual fall that began in mid-2014 lasted until that year’s end. But the 2015 tumble did not end with the ringing in of the new and today plumbed a depth not seen since 2004.

The reasons? Step outside to experience one — in many parts of the world where leaving the house should involve 10 minutes of layering up, the hats and gloves are being left at home. No snow in Moscow until the last days of December, the warmest Christmas Eve ever in Toronto, glum skiers in Switzerland. The phrases “disappointing performance” and “unusually warm weather” are being found together in retailers’ Christmas trading statements, as that winter coat becomes unnecessary. Oh baby it’s not cold outside and that glut of distillate heating oil won’t go away until it is.

And at the wellheads the crude keeps coming. There is no let-up in Russia’s planned exports; the UK North Sea had a remarkably productive year; a growing number of energy defaults in the US are having no noticeable deleterious effect on output. And, above all, Opec is now a limitless free-for-all, with bold claims from Kuwait and competitive pricing tactics from Saudi Arabia ahead of the return of Iranian crude. The Iranian oil minister may offer soothing words about easing its way back into the market, but it will surely not hesitate to retake what it sees as it share.

And all this crude is coming up against some consistently soft Chinese manufacturing PMI data. Swiss bank UBS says Chinese demand was responsible for 34pc of global demand growth in 2009-14, showing how difficult it is to wean producers from the Chinese teat. UBS’ worst-case scenario for China’s economy — one that is at pains to state is extremely unlikely — would delay the oil market rebalancing act by a year.

All this means that the disintegration in relations between Iran and Saudi Arabia — the tit-for-tat expulsions and embassy attacks — are providing no support for crude. The two may produce around 13mn b/d between them, but there is no direct threat to supply, and nor is there likely to be in an era when absolutely everyone is pumping flat out. Only if the world has to re-acquaint itself with the-what-and-the-where of the strait of Hormuz will there be an issue.

Senior Iranian oil official Mehdi Asali hit the nail on the head, saying: “The 2.5mn b/d oversupply is the biggest threat to the oil market … The impact of such political tension on the oil market will be short term. As soon as the market reacts to the supply, it will not react anymore.”

Fundamentals rule. Geopolitics is background noise. Pictures of burning storage tanks in Libya may send a temporary shiver through the markets, but they are at ports that have been closed to exports for a year and in an exporting country that is a shadow of its former self.

So it’s out with the old and in with the new, and get in touch if you can spot the difference.

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