1. Newsroom
  2. The reasons behind the oil price correction
Menu
Insight 20.02.2018

The reasons behind the oil price correction

The reasons behind the oil price correction

WTI oil prices are flat year-to-date after having seen the best start to a year in over a decade and reaching a 3-year high of USD 66.5 in mid-January.


WTI oil prices are flat year-to-date after having seen the best start to a year in over a decade and reaching a 3-year high of USD 66.5 in mid-January. At the beginning of February, oil prices tumbled by more than 8% to USD 60.5 on the back of worrying news about supply/demand fundamentals.

On the supply side, the market was alarmed by recent data that showed US oil production at an all-time high of 10.25 million barrels a day. Additionally, US crude oil inventories have stopped falling in the past 2 weeks, breaking a momentum of 10 weeks of decline and denting OPEC objectives of reducing inventories to a 5-year average. Last but not least, more than 29 oil rigs have been added in the last month reaching the highest level since April 2015, indicating a potential strong medium-term surge in the crude oil supply, coming predominantly from the US Permian Shale producers. The increase in rigs comes at a time when concerns about a major production spike are at a high level in the wake of the recent data from the Energy Agency, translating into a major hit to market sentiment. Investors remain unconvinced that US producer discipline will hold and it seems they might be proved right.

Demand is still healthy in the US and Chinese imports are at record highs with a positive outlook in the long term. China’s oil imports are now the largest in the world and are continuing to increase with strong demand growth and constant domestic crude production. The trend for larger cars (SUVs represent 40% of new sales) and the penetration of car ownership continue to drive Chinese demand. Additionally, we are still confident that demand growth in India could provide upside surprises.

Geopolitical appeasement has also contributed to the drop in oil prices, and we saw the recent risk premium associated with potential supply disruption erode. Looking at Saudi Arabia, the de facto leader of OPEC, both the domestic political “purge” and the Saudi-Qatari feud seem to have been scaled back, thus increasing the sustainability of the OPEC-led effort to cut global oil production while at the same time removing some of the risk premium on oil prices. The decrease in negative newsflow from major oil producers such as Venezuela and Iran have removed a big support to oil prices.

Despite the recent correction, the commodity price remains well above the average cash flow break-even level of integrated oil companies; these companies have been relatively resilient during the recent price correction. Looking at the earning season for the oil supermajors, Europe clearly outperformed the US with strong numbers in the upstream and mixed results in the downstream. Share buy-backs have also been announced across the board for the large, integrated, European companies with the aim of reducing the dilution experienced by shareholders in the last couple of years.

UBP Investment Expertise

Melki_Pierre_150x150.jpg

Pierre Melki
Equity Analyst Global Equity Research

Expertise

Hedge funds

UBP is one of the longest-standing investors in hedge funds and a leading European player in the sector.


Further reading

Insight 17.03.2023

Learning from the mistakes of the 1970s

2023 began with market optimism that the US could successfully navigate its battle with inflation. Recent data have confirmed our suspicions that getting inflation back to the Fed’s 2% target will be more challenging than markets had been assuming.

Insight 23.02.2023

Adapting Advisory portfolios to the improved fixed income outlook

As a decade of yield repression comes to an end, building a fixed income portfolio with an acceptable yield has become an easier task. Given a deteriorating economic background and hawkish policymakers, we believe in harvesting the attractive yields offered by short-term quality bonds, which currently have the best risk-return profile.

Insight 21.02.2023

Japan’s equity market: small is beautiful

The steep fall in valuations that started at the end of 2021 disproportionately affected the innovative growth segment of the Japanese market. With the stronger yen, companies that are less vulnerable to global cycles could prove to be the ones to consider.