“Gloom nourishes gloom,” says Commerzbank’s Eugen Weinberg. Oil had another downward lurch this week, with both Brent and US futures slipping to seven-year lows around $35 a barrel and edging close to 11-year lows. Since oil cartel Opec’s meeting a fortnight ago, oil has swooned by nearly 20%. This has sent the unusually commodities-heavy FTSE 100 index to a three-year low, down 10% since 1 January and 17% below its April record high. The Opec meeting removed any “last hopes of a reprieve for oil… and added another layer of downside sentiment to commodities”, David Hufton of PVM told the Financial Times.
Opec scrapped its production ceiling and, for now at least, seems determined to keep pumping until it has sunk American shale producers. Moreover, early this week Iran’s deputy oil minister said there was “absolutely no chance” that Iran will delay its planned increase in oil exports now that Western sanctions are set to be eased. To cap it all, according to one trader, a ceasefire may be taking shape in Libya. “If Libyan production can go back up, the price effect is almost unthinkable.” The Opec member’s output has dwindled to around 375,000 barrels a day from 1.6 million before the civil war began in 2011.
Even without Libya, Opec supply is likely to rise by a million barrels a day in 2016, reckons Morgan Stanley. It sees next year’s increase as stemming almost entirely from Iran, Iraq and Saudi Arabia. The upshot is that with demand growth unspectacular, the glut will last until at least late 2016, estimates the International Energy Agency.
Given these fundamentals, and the “very nervous” market, “I think it would be risky to rule out a $20 handle on oil”, says Nasdaq energy analyst Tamar Essner.
Bearish bets, or short positions by hedge funds and other big speculators in the US oil futures market, have jumped to a record high, while the number of people on the bullish side of the trade is at a five-year low. Whatever happens in the next few weeks, the upshot remains that “the path of least resistance is lower for longer”, says Ron Insana on CNBC.com. And take predictions of a rebound in 2017 with a pinch of salt. History shows that oil bear markets can be protracted affairs. Oil tends to “spike, crash and then remain depressed for years on end” – lower for even longer.