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

Impact investing - Contributing to a more sustainable future

What are the key features of impact investing?

Read more

European Equities

European equities offer unrivalled opportunities in terms of breadth of sector and market exposure.

阅读最多

洞见 01.10.2020

COVID-19: UBP keeps you up to date

Since this coronavirus appeared, UBP has provided its clients with guidance and support as we all tackle this unprecedented global health crisis. We give you regular updates on everything from our own safety protocols and the recommendations issued by the authorities to our experts’ latest analysis on the effects of the pandemic on the world economy and financial markets.

洞见 24.11.2020

Hidden gems in Swiss & European small caps

Small and mid caps have traditionally recorded higher growth rates and investment returns over the long term than large caps: it is easier to generate a dynamic growth rate from a smaller base. Swiss and European small and medium-sized capitalisations – so-called ‘SMID caps’ – also tend to provide investors with ‘pure play’ exposure to major secular growth trends.

洞见 17.12.2020

UBP Investment Outlook 2021

A Brave New World


延伸阅读

洞见 11.01.2021

The distinguishing features of impact investing

Impact investing is clearly differentiated from other sustainable investment solutions, but still takes ESG criteria into account.

洞见 05.01.2021

Social & Affordable Housing

Over 1.1 million households in England are on local authority waiting lists for affordable housing. Furthermore, it is widely expected that waiting lists will lengthen as more households will be forced to seek cheaper accommodation due to the impact of COVID-19.

洞见 21.12.2020

China: Don’t fret over an increase in corporate bond defaults

Bond defaults were not part of the debate for much of 2020. However, these have picked up steam in Q4-20, resulting in a record level of USD 21.8 billion YTD, far exceeding the previous high of 2018.