Commodity Update; Crude Oil – 08 September 2014

Oil benchmarks continue to fall on rising supply; shrugs off better economic data

Crude oil benchmarks collapsed last week following a short period of relative stability, as rising supply and breaking news of a ceasefire in eastern Ukraine drove investors to reduce bets on a price recovery.

As a result both benchmarks set new lows for 2014, contrary to our expectation of a gentle and moderate recovery. Brent broke below $100 per barrel, touching noses with $99.37; while WTI reached the depths of the 90’s at $91.00.

In detail, North American production has reached its highest level since the 1980’s while, despite an ongoing civil conflict, Libyan output has also reached its highest level since mid 2013 (780,000 Bp/d).

In addition to rising supply, a tentative ceasefire in Ukraine has led to hopes among some market participants that sanctions against Russia could soon ease and that this would lead to lesser concerns over security of supply.

Despite the events of last week, we reiterate our belief that prices are unlikely to move substantially lower from the current levels going forward, particularly in relation to Brent. This is as the Brent benchmarks price has now breached the internal floor set by OPEC, a level which it needs to achieve if fiscal targets are to be met.

While over the longer term there is little that the likes of OPEC will be able to do to prevent the price effects of increasing supply from other regions such as the US, in the short term it is possible that the decision will be taken to curtail output in order for prices to recover. For this reason, we expect the market to exert greater caution when it comes to speculative short positions.




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