Oil Unhinged : ``What the Hell is Going on``?

Sunday, January 3, 2016

By Tom O'Sullivan

Tokyo- (PanOrient News) Comments by the current leading GOP contender to be next president of the United States, Donald Trump, "What the hell is going on?", could equally have applied to oil markets.

Brent oil prices dipped below $40 for the first time in 7 years last month , 60% below the level of one year ago while US oil prices hit a new Y2014/Y2015 low of $37.50. Forecasts for oil prices of $20/barrel are starting to re-emerge. This is impacting the equity and credit market outlook for the entire energy sector and some emerging market exporting countries.

This followed the OPEC meeting on December 4th where OPEC production caps were abandoned and a proxy oil price war may now be breaking out between Iran and Saudi Arabia. Everything else including the US shale oil industry may now be collateral damage. Russian oil production is also hitting new highs of 11 mbpd.

Most major US and European equity market indices also dropped by 100bps overnight.

Meanwhile, gasoline prices in the United States are approaching $2 a gallon and Henry Hub Natural Gas prices in the US are approaching $2 mmbtu close to historic lows.

Poor economic news out of China in December for both exports and imports continu ed to negatively impact energy and commodity markets. It would now appear that China is on a path to export its spare capacity and deflation to the rest of the world compounding a "digital deflation" that many markets may already be experiencing. Volumetric export data out of China were apparently up in the most recent data reading although dollar based export numbers were down.

A near-term 2% inflation target for Japan would now appear to be entirely unrealistic.

The US Federal Reserve also seem to be locked into a policy change that will see US interest rates rise. Dollar strength, that may already be discounted into market expectations, is expected be an additional negative for oil prices and the energy sector.

Tom O'Sullivan is the Founder of Mathyos Japan a Tokyo based independent energy consultancy.

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