Low oil prices are the cure for high production, says economist OLE Slot Hansen. According to the expert, given the growing number of producers with high costs in the U.S. and Canada, in the near future oil production will begin to decline.
BRUSSELS, Jan 11 – Maria Knyazev. Low oil prices can reduce production of “black gold” in the coming months, as a growing number of manufacturers in the U.S. and Canada who are already working in conditions of prices below the closing level of production, says strategist and Director of exchange-traded products Department investment Bank Saxo Bank OLE Slot Hansen.
“The sharp depreciation of the Chinese yuan caused the collapse of global markets during the first trading week of the year … oil Prices fell to the lowest since 2004, the price of gold jumped up due to the demand for safe-haven assets and the correction of an excessive amount of short positions, and industrial metals have collapsed in the face of danger stronger than expected deceleration of China’s economy, the largest consumer of this type of metals,” he writes in the weekly overview of the commodities market.
That affected the energy sector, he said.
The expert writes that the traders of the oil market was caught off guard by heightened geopolitical tension between Iran and Saudi Arabia. However, the resulting rise in the market lasted less than a day, and then followed by a sharp drop.
“It happened because market participants once again shifted to the problem of excess global supply, which in this quarter, presumably, will only get worse, and the improvement will come only later this year,” he wrote. In addition, traders had to take into account the potential effects of unmet expectations demand in China, the expert added.
At the same time, he believes that low prices are the cure for high production. “Given the growing number of producers with high costs in the U.S. and Canada who work in conditions of prices below the closing level of production, in the coming weeks and months, the production volumes will begin to decline,” — says Hansen.
But before that happens, the market will have to deal with additional volumes of Iranian oil, along with high inventory levels in the U.S., with more than 100 million barrels exceed the five-year average, says the review.
The analyst says that over the last couple of months, the important stocks in storage in Cushing (Oklahoma), center for delivery of WTI crude oil traded in futures contracts, rose by 10 million barrels. In storage is 63 million barrels, and they are almost full. When this happens, owners of stores have to sell oil at reduced prices to attract buyers, he said.
“Oil prices will begin to recover only when market participants are convinced that the threat of further losses of their past. Then can begin rapid growth and the closing of speculative short positions would provide additional upside momentum”, — says the analyst.
“Geopolitical risks have not disappeared, and the conflict between Iran and Saudi Arabia in the beginning of the new year reminded us of this. However, it also clearly shows that the market has become more resilient to shocks, as an absolute oversupply diminished the threat of sharp price spikes like those that we observed at the beginning of the current decade”, — the expert believes.
Usually, the geopolitical risk premium included in the price of Brent crude oil, so the slightest increase in the level of tension will allow this class to restore a price advantage over WTI grade, lost after the repeal of the U.S. ban on exports last month, he said.