The old traders’ adage “better to travel than arrive” has been true in 2017. Last year was the year to hitch a ride on oil, doubling to $55 billion from the Q1 lows; investors piled into oil-leveraged equities, the MSCI Energy Index surged 23% and outperformed the broader market by 18%. However, the feeling was that prices made the big move, by encroaching on the annual average forecast of $57 billion for 2017.
The journey has been smooth in the beginning of 2017, but now upward momentum ceased and investors’ appetite dulled; crude prices dropped, with WTI falling below $50 billion, while the sell down of oil and gas shares accelerated. The MSCI Energy has lost 2/3 of 2016’s relative gains since oil markets were triggered by confidence when financial pain forced OPEC to shift strategy and support prices.
So, why do oil prices come under downward pressure? According to experts, there are three reasons: Chinese New Year, mild weather in the United States, and India’s demonetization have slowed/stalled demand growth; the U.S. tight oil operators are enhancing their capital to work again and this recovery may cost inflation take-off; even if OPEC will extend 2017 production cuts, thus driving a global stock draw, in 2018 there will be lots of additional oil.
In this sense, millions of b/d will be produced if no new agreement will be struck. This is double the 1.0 million b/d demand growth is expected next year. Consequently, the implication is an inventory build in 2018 or OPEC which will force partners to reach a new agreement.
The gLAWcal Team
Tuesday, 28 March 2017