LONDON and NEW YORK – Evercore ISI’s Oilfield Services, Equipment & Drilling group and Douglas-Westwood (DW) London have issued updates weighing in on recent market activity, including trouble in the Chinese markets and continuing low oil prices.
Fay Bridges, of DW London, noted that 2016 was off to a particularly turbulent start. Oil prices have been extremely volatile since the first trading day of 2016 and hit 12-year lows last week with Brent dropping below $33/bbl for the first time since 2005. The fall in the Chinese manufacturing index, the Saudi-Iran standoff and North Korean nuclear test have all had a significant impact on shaping oil price trends.
Brent crude rose to a three-week high of $38.91/bbl on Jan. 4 as a consequence of the Saudi-Iran geopolitical risk, but these gains were quickly diminished due to concerns over economic slowdown. Rising tensions in the Middle East typically trigger an increase in the price of oil, yet it seems that bearish sentiment elsewhere has prevailed over potential risk, she said.
Adding to uncertainty over the growth in China, news of the North Korean nuclear test came on Jan. 6, which triggered Japanese and South Korean stocks in Asia to decrease overnight as investors looked to less risky assets.
“While this has contributed to further geopolitical uncertainties, it is unlikely that it will have a sustained impact on oil prices,” Bridges said.
Nevertheless, oil prices are likely to remain at low levels until the supply-demand balance tightens, with prospects of production declines or a pick up in the global state of the economy seeming unlikely in the short-term, Bridges concluded.
The global sell-off related to China was exacerbated by heightened tensions between Saudi Arabia and Iran - which pushes out any OPEC change - was likely overdone, Evercore ISI’s James West said.
“The Chinese equity market bears little resemblance to actual economic activity in China; with respect to OPEC, while we would welcome their help with supply, the market is already tightening and market fundamentals are poised to methodically improve throughout 2016,” he said.
An exceptionally warm start to the winter; reduced IMF global growth projections; mixed signals from China; continued builds in global oil inventories; and a lack of cohesion within OPEC have all led to some stalling in the rebalancing for oil markets, Evercore ISI found.
“However, we continue to expect supply to resolve the oil price issue,” West continued. “While we anticipate demand growth forecasts to remain intact, the market may soon be surprised by downward revisions to supply. Brazil is a great example … with Petrobras’ offshore rig count expected to fall to 2008 levels by the end of this year, supply is likely to surprise to the downside and the company may be forced to revise their 2020 plan lower once again. Angola is another example, where the country’s working floater count has dropped to just 12 from over 20 in early 2014.”