The Daily Update - Oil, Catch a Falling Knife

The collapse in the oil price continued yesterday with Brent down 6.41% at one stage before a ‘dead cat bounce’ of less than a dollar. While we believe that there is now an awful lot of bad news in current pricing especially regarding the supply situation, there appears to be very little interest in catching the proverbial falling knife. Indeed the perfect storm of bearish drivers, headlined by supply, with Iranian waivers a key element, and a negative outlook for 2019 demand/supply conditions, continues to force prices lower.

The December 6th OPEC meeting is the focus now with President Trump calling for lower pricing while at the same time stating that Saudi Arabia remains a key security partner and has been ‘very responsive’ to his requests to keep oil pricing at ‘reasonable levels’. This is at a time when investigations continue into the Crown Prince’s involvement in the killing of Jamal Khashoggi and is being seen as further pressure on Saudi Arabia to maintain supply even in the face of falling crude pricing.

Of course, US supply has been a factor as well with inventories marching ever higher, in fact, the US is now virtually self-sufficient in regards to oil from the net imports of 3.77 million barrels a day in 2017. Indeed the American Petroleum Institute (API) reported the first weekly draw in US crude inventories since mid-September yesterday, a draw of 1.55 million barrels over the week when expectations were for a further 3.45 million barrels build in stocks.

There are winners and losers from the oil price fall, Russia a huge exporter will definitely feel the pinch but as we all know they have the ability to utilise the Ruble to reduce the cost of production. By far the biggest winner is India, a massive oil importer, it is thought that a $10 fall in crude equates to a 0.4% of GDP equivalent impact on India’s current account.

Of course oil is way above the lows of 2016 despite yesterday trading at the lows for this year but is still comfortably above the physiological level of $50 where most producers are still profitable.

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