Oil prices fell last week, extending its losing streak after OPEC reported an increase in oil production from Saudi Arabia coupled with sizeable increases to U.S. outputs. This comes after a short-term rally was experienced following the Trump election, in which many saw oil prices continuing to rise at a lower resistance of $50 a barrel. However, as decisions to increase drilling have stirred in both Washington and abroad, investors and speculators alike have seen the emersion of a supply glut within the market, thereby greatly diminishing commodity prices. This, in turn, has resulted in severe losses within the natural resources sector of the stock market, as oil refineries and companies that operate within that line of business suffer depreciated returns on account of diminished profit margins. Below is a chart highlighting oil production amongst notable oil producers:
However, its is essential to note that while OPEC’s production has increased slightly, the consumer market has also been ravaged by increased U.S. production which has climbed to 9 million barrels a day in February, up 430,000 barrels a day from September 2016. Furthermore, given the interest rate hike on part of the Federal Reserve and Janet Yellen, the assumed strengthening of the dollar could spell disastrous consequences for foreign oil traders, as higher dollar-denomination would greatly increase international costs of trade between the U.S and sovereign nations abroad.
Jeffrey Halley, a senior market analyst at Oanda trading group, said the inventories report was the “straw that broke the camel’s back”, with concerns already abounding that Russia was not pulling its weight on much-vaunted production cuts agreed between OPEC and non-OPEC countries in November. Furthermore, Greg McKenna, chief market strategist at AxiTrader, said that there is a growing unease that far too much emphasis is placed upon denominated oil players like Saudi Arabia to curtail oil production in order to alleviate price inflation and stimulate deflation.
This, in turn, has diminished hopes for a renewed revival of drilling in America, as lower prices threaten many large oil companies and deter further drilling in an effort to artificially rally the price of oil through a supply shortage. As such, West Texas Intermediate crude prices dropped from $54.45 to $49.05 in a few days, effectively wiping out gains that followed a Nov. 29 deal with Saudi Arabia, Russia, and several other countries to slash production by 1.6 million barrels a day
However, not all may be lost as the euro rallied briefly against the dollar as the European Central Bank (ECB) no longer saw a threat of deflation. Furthermore, the ECB kept interest rates at historic low accompanied by massive quantitative easing to support the eurozone economy by artificially inflating the dollar to stimulate credit within the market. As it stands the ECB has currently raised its forecasted growth to 1.8%, with an expected inflation rate of 1.7%, just under the intended 2.0% healthy benchmark.
According to ECB chief Mario Draghi, the central bank sees no urgent need to further additional measures in support of the economy, limiting intervention into interest rates. As Neil Wilson, senior market analyst at ETX capital stated, “Deflation is no longer the concern for the ECB – prices are not rising fast enough to warrant tapering or higher rates, but the imminent risk of deflation has passed.”
On a side note, however, the dismal oil figures and Eurozone news ultimately overshadowed a positive jobs number from the private sector in the United States, which beefed up expectations for Friday’s key government jobs report coupled with an optimistic US jobless claims which point to a healthy labor market.
- Royal Dutch Shell (LSE: 0LN9.L – news) slid 2.8 percent and rival BP lost 1.6 percent on the London stock market. The FTSE 100 index was weighed down also by falling mining shares.
- Asian energy firms had already taken a hit, with Japan’s Inpex shedding 1.2 percent, Hong Kong-listed PetroChina (HKSE: 0857-OL.HK – news) diving 2.2 percent and CNOOC (HKSE: 0883-OL.HK – news) losing 1.8 percent.
- Woodside Petroleum (Frankfurt: WOP.F – news) fell 1.1 percent in Sydney and later in European activity, French energy group Total (LSE: 524773.L – news) dropped 2.0 percent