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

Newsletter

Sign up to receive UBP’s latest news & investment insights directly in your inbox

Click and enter your email address to subscribe

Investissement responsable

Quand l’investissement responsable crée de la valeur

Plus d'infromation sur l'investissement responsable UBP

Regarder la vidéo

Actualités les plus lues

UBP dans la presse 09.05.2018

Le Japon entre en mutation

Comprendre les dynamiques du Japon s’apparente parfois aux mathématiques. Appréhender ce marché revient-il à déchiffrer une équation différentielle ? Pas seulement. Comme pour beaucoup de champs des mathématiques, le temps alloué est important.

UBP dans la presse 01.05.2018

Méritocratie et réglementation européenne

La tradition suisse de la méritocratie remise en question par la réglementation européenne ?

UBP dans la presse 26.04.2018

Emergents: scrutez les bonnes pratiques

Bilan (Mars 2018) - Qui a dit que les marchés émergents et les considérations ESG étaient incompatibles ? Analyser les comportements environnementaux, sociaux et de gouvernance (ESG) lors de décisions d’investissement est aussi utile pour les actifs des pays émergents.

A lire également

UBP dans la presse 09.05.2018

Le Japon entre en mutation

Comprendre les dynamiques du Japon s’apparente parfois aux mathématiques. Appréhender ce marché revient-il à déchiffrer une équation différentielle ? Pas seulement. Comme pour beaucoup de champs des mathématiques, le temps alloué est important.

UBP dans la presse 01.05.2018

Méritocratie et réglementation européenne

La tradition suisse de la méritocratie remise en question par la réglementation européenne ?

UBP dans la presse 26.04.2018

Emergents: scrutez les bonnes pratiques

Bilan (Mars 2018) - Qui a dit que les marchés émergents et les considérations ESG étaient incompatibles ? Analyser les comportements environnementaux, sociaux et de gouvernance (ESG) lors de décisions d’investissement est aussi utile pour les actifs des pays émergents.