18 Jan 2016

A lot of this week’s financial market moves have been linked to the continued slip in the price of a barrel of oil, a key commodity whose price serves as a global barometer for growth (it’s used in everything from facial products to Lego bricks) as well as the health of the commodity space in general. The former is already troubled by a slower growing and transitioning Chinese economy (another reason for market volatility) while the Eurozone continues to struggle to get out of the blocks post-crisis; the latter is suffering an acute bout of indigestion following years of over-investment while commodity prices remained high, resulting in awkward supply gluts in the face of slowing demand.

While Miners are electing to leave raw materials like Copper and Iron ore in the ground oil drillers continue to pump at full capacity to make as much as they can from every barrel with oil prices at fresh 12yr lows. A Stubborn OPEC refuses to cut output, not wanting to surrender to newbie US Shale frackers nor non-OPEC countries like Russia (still suffering under the weight of sanctions). While none of this is new, what has spooked traders most this week is prospect of an imminent return by Iran, potentially flooding an already oversupplied market with millions of barrels of oil after sanctions were lifted following last year’s landmark anti-nuclear deal.

As the price of a barrel has fallen from $110 to trade below $30 as we write, analysts have competed to be the most bearish, with targets of $20, $16 even $10 (adding to market excitement), suggesting declines towards 2001 lows of $17 which begs the question: at what point does the value of the barrel eclipse the value of what it contains? As they say, the further we fall the closer we must be to the bottom. However, until either one of the supply side producers blinks or the demand side economies improve markedly, the outlook remains bleak.

Mike van Dulken, Head of Research