The price of oil: 4 negative factor for the cost of a barrel
The price of oil, demonstrating a powerful rally in the middle of the month to above $80 per barrel of Brent crude, adjusted to $75 this week. We see 4 main factors that had a negative impact on the dynamics of oil prices:
1. Comments of representatives of Russia and Saudi Arabia about the possibility of production growth in the foreseeable future and revise current agreements between the OPEC members and their allies fueled expectations regarding the possible return of the oil market towards surplus.
2. On the market there were hearings on long-term contracts for the supply of oil from the U.S. to China, which will be discussed by the parties in the framework of attempts to reduce US trade deficit with China. Oil exports from the US has serious infrastructure constraints, but assuming that they are soluble in the medium term, the situation looks negative for the oil market. The appearance on the market of a new player (i.e. USA), capable of providing for its supply the growing demand for oil in China again leads the market in state of surplus.
3. We should not forget that China started trading oil futures denominated in yuan on March 26. This tool is available to foreign investors, and trading volumes on it have increased more than 4 times in 2 months. Oil futures on the Shanghai stock exchange already accounts for around 20% of the world total trading derivatives on oil. Thus, the yuan is beginning to have a significant impact on oil prices. Yuan showed a strong weakening in the second quarter from the level of 6.26 to 6.43 in relation to the U.S. dollar. A weak yuan means lower the price of oil in US dollars, which, it should be noted, it is advantageous for China as the largest importer of oil.
4. Concerns about situation in Italy and other Eurozone countries (Spain and Portugal), along with the continuing growth of risk indicators and the fall of debt instruments, led to a reorientation of the investors in the US dollar. The strengthening of the US dollar traditionally has a negative impact on commodity markets, including oil.
The main factors that will determine the dynamics of oil prices in the near future will be the outcome of negotiations between the U.S. and China on issues of trade relations. The official U.S. delegation plans to visit China June 2-4. The development of the situation in Italy also remains a critical factor, as the number of risk indicators is comparable with levels that we last saw before the referendum on Brexit.
Fundamentally, we believe the potential for further reduction in oil prices is limited, since the increase in the production of OPEC and Russia in the amount of 1-1,5 million barrels per day could be absorbed by the market given the falling production in several countries. Negotiations between China and the US can be long term, while the United States need considerable time to the construction of infrastructure for oil exports.
The Director of the office of markets and stocks