Volatility in oil prices casts shadow over 2019 outlook 

Speculators have cut back their previous short positions in Brent futures and extended their long positions(AFP file photo)
Updated 13 January 2019
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Volatility in oil prices casts shadow over 2019 outlook 

  • The change in speculative flows marks a reversal from last month’s gloomy activities

RIYADH: Oil prices rebounded to their highest level in a month, the Brent crude price rose back above the psychological level of $60 per barrel in the longest rally since 2017, and WTI increased to $52.59 per barrel. The Brent / WTI spread narrowed to $7.41 per barrel. 

Oil market sentiment went from extreme bearishness to extreme bullishness in less than a month. This short cycle disconnects the oil market from earlier bearish sentiments driven by other commodity markets, which had broader support from equity markets. Noticeably, equity markets are still down from a year ago but are steadily clawing back gains.

Speculative short positions over the past two months that took the Brent crude price down to a 16-month low at $50 per barrel amid bearish momentum, and neglected bullish sentiments, proved a huge disconnection from the physical market fundamentals. 

Market sentiments have changed lately, with banks and hedge funds trading oil futures and options while removing new bets from falling oil prices, changing back into rising oil price bets. Consequently, speculators have cut back their previous short positions in Brent futures and extended their long positions. 

This change in speculative flows marks a reversal from last month’s gloomy activities, after tireless efforts to exit bullish oil positions with limited buying interest. Yet some speculators are still cautious in betting on prices’ upward movement. 

Apparently crude oil is back to a bull market, with prices on an upward momentum since the start of 2019. However, the World Bank expects trade tensions to slow global economic growth to 2.9 percent in 2019 from 3 percent in 2018. The divergence from any possible global economic slowdown and oil demand growth has been widely realized by market participants. 

The potential end of the US-China trade war is not adding to oil’s momentum, as demand growth is still upbeat and bull market confidence grows over the global economy and the upcoming tight oil market amid signs of OPEC+ compliance to the new output cuts. The first signs of supply/demand tightening are nonetheless starting to filter in, with dwindling oil tanker freight rates.

The impact of low oil prices in 2015-2016 on upstream investment, which resulted in huge CAPEX cuts, has eventually shown its first signs in the lowest forecasts for Norway’s oil output in three decades.

Extreme oil price volatility in late 2018 has also cast some doubt on oil producers’ capital spending plans in 2019, with Brent now hovering around $60 per barrel after reaching $86 in October.

Norway’s oil output decline was expected to start from mid-2020. But its oil production continues to decline faster than expected due to matured oil fields that caused uncertainty in production forecasts, led by lower upstream investments and a lack of new discoveries to offset any output fall. Norway’s crude oil production currently stands at around 1.3 million barrels per day (bpd), down from 1.5 million bpd a year ago.

  • Faisal Mrza is an energy and oil marketing adviser. He was formerly with the OPEC and Saudi Aramco. Twitter:@faisalmrza

 


Foreign investors hope India dials back policy shocks after Modi win

Updated 24 May 2019
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Foreign investors hope India dials back policy shocks after Modi win

  • Modi’s pro-business image and India’s youthful population have lured foreign investors
  • After Modi’s win, about a dozen officials of foreign companies in India and their advisers said they hoped he would ease his stance and dilute some of the policies

NEW DELHI: Foreign companies in India have welcomed Prime Minister Narendra Modi’s election victory for the political stability it brings, but now they need to see him soften a protectionist stance adopted in the past year.
Modi’s pro-business image and India’s youthful population have lured foreign investors, with US firms such as Amazon.com , Walmart and Mastercard committing billions of dollars in investments and ramping up hiring.
India is also the biggest market by users for firms such as Facebook Inc, and its subsidiary, WhatsApp.
But from around 2017, critics say, the Hindu nationalist leader took a harder, protectionist line on sectors such as e-commerce and technology, crafting some policies that appeared to aim at whipping up patriotic fervor ahead of elections.

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“I hope he’s now back to wooing businesses,” said Prasanto Roy, a technology policy analyst based in New Delhi, who advises global tech firms.
“Global firms remain deeply concerned about the lack of policy stability or predictability, this has sent a worrying message to global investors.”
India stuck to its policies despite protests and aggressive lobbying by the United States government, US-India trade bodies and companies themselves.
Small hurdles
Modi was set to hold talks on Friday to form a new cabinet after election panel data showed his Bharatiya Janata Party had won 302 of the 542 seats at stake and was leading in one more, up from the 282 it won in 2014.
After Modi’s win, about a dozen officials of foreign companies in India and their advisers told Reuters they hoped he would ease his stance and dilute some of the policies.
Other investors hope the government will avoid sudden policy changes on investment and regulation that catch them off guard and prove very costly, urging instead industry-wide consultation that permits time to prepare.
Protectionism concerns “are small hurdles you have to go through,” however, said Prem Watsa, the chairman of Canadian diversified investment firm Fairfax Financial, which has investments of $5 billion in India.
“There will be more business-friendly policies and more private enterprise coming into India,” he told Reuters in an interview.
Tech, healthcare and beyond
Among the firms looking for more friendly steps are global payments companies that had benefited since 2016 from Modi’s push for electronic payments instead of cash.
Last year, however, firms such as Mastercard and Visa were asked to store more of their data in India, to allow “unfettered supervisory access,” a change that prompted WhatsApp to delay plans for a payments service.
Modi’s government has also drafted a law to clamp similar stringent data norms on the entire sector.
But abrupt changes to rules on foreign investment in e-commerce stoked alarm at firms such as Amazon, which saw India operations disrupted briefly in February, and Walmart, just months after it invested $16 billion in India’s Flipkart.
Policy changes also hurt foreign players in the $5-billion medical device industry, such as Abbott Laboratories, Boston Scientific and Johnson & Johnson, following 2017 price caps on products such as heart stents and knee implants.
Modi’s government said the move aimed to help poor patients and curb profiteering, but the US government and lobby groups said it harmed innovation, profits and investment plans.
“If foreign companies see their future in this country on a long-term basis...they will have to look at the interests of the people,” Ashwani MaHajjan, an official of a nationalist group that pushed for some of the measures, told Reuters.
That view was echoed this week by two policymakers who said government policies will focus on strengthening India’s own companies, while providing foreign players with adequate opportunities for growth.
Such comments worry foreign executives who fear Modi is not about to change his protectionist stance in a hurry, with one offical of a US tech firm saying, “I’d rather be more worried than be optimistic.”