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

 


Time to tear down Mideast trade barriers, Davos panel hears

Updated 23 January 2019
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Time to tear down Mideast trade barriers, Davos panel hears

  • Mohammad Al-Tuwaijri, Saudi minister of economy and planning, said a move to ease movement of traffic across the border could be followed elsewhere
  • Majid Al Futtaim CEO Alain Bejjani: Now there’s this seriousness between Saudi Arabia and the UAE, I hope it gets to frictionless trade

DAVOS: Amid global trade wars and the rise of protectionism, Middle East economic and business leaders on Tuesday issued a clarion call for the exact opposite: To ease customs restrictions in the region.
A panel at Davos heard how an agreement between Saudi Arabia and the UAE to boost cooperation — including the reduction of obstacles to trade across the shared border — could be a blueprint for the wider region.
Mohammad Al-Tuwaijri, Saudi minister of economy and planning, said a move to ease movement of traffic across the border — partly through the use of technology — could be followed elsewhere. “We want to establish a reference for others to follow,” he said.
Alain Bejjani, CEO of retail and leisure group Majid Al Futtaim, said “frictionless trade” would give the region a boost.
“Now there’s this seriousness between Saudi Arabia and the UAE, I hope it gets to frictionless trade,” he told Arab News on the sidelines of the Davos forum.
Bejjani declined to say whether that would involve a customs union, a common market or a common currency. Given the imposition of trade tariffs between the US and China, and the rise of Brexit, globalization — something espoused by many Davos delegates — is seen as on the wane.
But Bejjani said breaking down barriers in the Middle East could help it better compete with Western Europe and the US.
“For the past almost century now… we’ve been ingeniously working on making sure we put barriers across the Arab world. The reality is we have a market that’s as big as most of the largest markets in the world… if we’re smart enough to work together,” he told the Davos panel.
Khalid Al-Rumaihi, chief executive of the Bahrain Economic Development Board, agreed that Saudi-UAE cooperation was “a great template” for others to follow.
Aside from “opening up” Middle East markets, Al-Rumaihi said harmonizing regulation in the region would also be beneficial to businesses and entrepreneurs.
“If the rules are changing in each country, if they’re not harmonized, it’s very difficult… for an entrepreneur (to understand) the regulatory environment. So they don’t scale very quickly, and that’s something we need to solve,” he said. Talk of freer trade within the Middle East is especially relevant when it comes to the Palestinian territories, which are subject to Israeli occupation and blockade.
Palestinian Prime Minister Rami Hamdallah said freer movement and a reduction of duties would help the economy grow.
“We need to see our products being waived (of) customs,” he said. “We need mobility — we’re under occupation.”