Commodity Update; Crude Oil – 01 December 2014

Crude benchmarks fall to a new multi year low in the wake of OPEC decision to leave output unchanged

Crude benchmarks fell persistently last week, before increasing the pace of losses at the back end, as OPEC opted not to cut oil production in order to prop up market prices.

Considering that there were few who actually expected anything different from OPEC, with Brent crude falling below $70 per barrel and WTI below $64 on the back of the announcement; the market’s reaction may seem particularly harsh to some.

However, we note that the current levels remain excessive relative to pre-2008 prices and cannot really be justified when considering that growth in Europe still remains weak, demand from China is set to cool and that production in the US could also increase further during the year ahead.

As a result, we believe that the additional drop in prices post-OPEC denotes the likely direction of both benchmarks during the months ahead and when put into context, merely forms another move back towards the long term average for crude prices.

Although a negative development for oil companies and producer states, lower oil prices will be positive for consumers as they should add to downward pressure upon energy and fuel costs; therefore providing a form of stimulus to the economy in itself.

However, if sustained for an extended period, or exacerbated for any one of a number of reasons; the oil price deceleration could eventually pose a risk to global markets. Most notably, if balance sheets of producer nations become overstretched then it is possible that, like in 1998, a crisis could ensue.

This would have negative connotations for risk appetites and confidence levels across financial markets, therefore, posing a risk to portfolio returns.










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