Oil price below $60 sends Gulf stocks lower
Posted on 13 July 2009 with no comments from readers
Gulf stocks have taken a beating over the past week with pressure on hydrocarbon prices giving investors packing up for the summer another reason to sell.
Oil prices could move even lower. After all $60 would have been considered a very good price 18 months ago and the global economy has changed dramatically for the worse since then.
Roller-coaster ride
Of course, the pattern of oil prices has been more of a roller-coaster ride over that period: up to $147 in July, down to $33 in December and then back up to $73 last month. Gulf stock markets followed a similar pattern but without showing such a sharp recovery this year.
It is far from impossible to see oil striking another low before recovering again. There are record oil stocks on land and floating at sea which could easily be dumped on the market in a panic about prices, exaggerating the downside. Even Iraq has restored pre-invasion production levels.
The recovery in demand for oil this year also seems to have been driven by stockpiling and not an upturn in the global economy where trade has actually seen a bigger slump than in the 1930s. With business down and economies shrinking all over the world it is hard to see where sustainable energy demand could emerge.
That perhaps accounts for caution among stock market investors in the Gulf States, with shares in Qatar yesterday trading at their lowest levels for two months. But clearly the risk still seems to be to the downside if hydrocarbon prices are now in a down trend.
It is remarkable, not to say almost unbelievable, that oil and gas prices have surged while the global economy has tanked in a way not seen since the Great Depression. Even Chinese exports fell 23 per cent last month, falling for the ninth month in succession.
Economic fundamentals
Last month US auto sales registered their smallest year-on-year decline since Lehman Brothers crashed last September, but that was still 31 per cent down. German and Japanese falls in GDP will be the worst since the Second World War as their status as major exporting nations is now working against them.
In short, the oil market and Gulf stock markets seem set to repeat the experience of last autumn. The question then is whether global governments can pull off another series of stimulus packages to keep the show on the road, and whether that money will again inflate the cost of energy.
It probably will, and that would make oil assets and Gulf stocks a good buy when markets weaken.
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uly 16 (Bloomberg) — Crude oil will collapse to $20 a barrel this year as the recession takes a deeper toll on fuel demand, according to academic and former U.S. government adviser Philip Verleger.
A crude surplus of 100 million barrels will accumulate by the end of the year, straining global storage capacity and sending prices to a seven-year low, said Verleger, who correctly predicted in 2007 that prices were set to exceed $100. Supply is outpacing demand by about 1 million barrels a day, he said.
“The economic situation is not getting better,” Verleger, 64, a professor at the University of Calgary and head of consultant PKVerleger LLC, said in a telephone interview yesterday. “Global refinery runs are going to be much lower in the fall. If the recession continues and it’s a warm winter, it’s going to be devastating.”
Crude oil last traded at $20 a barrel in February 2002. Futures were at $61.18 today in New York, having recovered 89 percent from a four-year low reached last December. The Organization of Petroleum Exporting Countries is implementing record supply cuts announced last year in response to plunging consumption.
“OPEC don’t realize the magnitude of the cuts they need to make,” which would total about a further 2 million barrels a day, Verleger added. “Storage is going to become tight. It’s not clear if there’s going to be enough storage available.”
China, Inflation
Oil will average $63.91 in the fourth quarter, according to the median of analyst forecasts compiled by Bloomberg. Crude for December delivery traded at $65.46 today in New York. Prices have rebounded on expectations of a demand recovery, led by China and other developing economies, and concern expansionary monetary policy would stoke inflation and weaken the dollar.
“China is in a real desperate situation,” said Verleger, who publishes the Petroleum Economics Monthly. “We’re in a situation where U.S. consumers aren’t consuming and Chinese manufacturers get hurt. Economists are looking for growth in all the wrong places.”
Forward contracts for oil have been higher than prices for immediate delivery this year, a situation known as contango, creating incentives to buy crude now and store it. That may end as growing stockpiles make storage more expensive.
“Prices would be much lower today, but for the very large incentive to build inventories,” Verleger said. “You need forward buyers, which we had when people were fearing inflation, but as concerns turn toward deflation” that will no longer be the case.