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Tuesday, December 6, 2016

The British referendum has hit oil prices


Was emerging upward trend in oil prices threatens to break. On the eve of the quotes fell by five percent, while on Friday and began to recover. One of the factors of decline – the consequences of the British referendum. What is happening in the oil market and when prices for oil can be expected in the near future?

On Friday, oil prices returned to growth, moving away from two-month lows reached recently, when the cost of black gold decreased by 5%. This fall on Thursday occurred after the publication of data about decrease in stocks in the United States. It was not as significant as expected.

“The impressive decline in oil has not led to the sale of the ruble, although a month ago the picture was diametrically opposite”

“After repealed short-term factors – the strike of Norwegian oil workers, disruption of Nigerian supplies and others, it became clear that the market has overestimated the us demand for fuel during a season of holidays and vacations. At the same time production of black gold continues to grow. This creates a solid Foundation for the formation of a new wave of the “bearish” trend”, – said the Deputy Director of analytical Department of “Alpari” Anna Kokoreva.

Meanwhile, Western traders believe that yesterday’s five-percent drop in oil prices in response to inventory reduction was excessive, because the oil reserves in the United States continues to decline. In addition, oil production in the USA fell again. This positive market ignored yesterday, but today, given the fact that oil beginning of a small rise (1% to 14.30 MSK), the situation has stabilized, speculative panic was avoided.

Interestingly, an impressive reduction of oil led to the sale of the ruble. The reasons for the resistance behavior of the ruble to cycles of decline in oil prices remain a mystery, since a month ago the picture was diametrically opposite, says the head of analytical Department of Bank “Zenith” Vladimir Evstifeev. However, whatever factors neither caused such a discrepancy, in his opinion, the ruble is unlikely to be able to keep neutrality in case of further decline in oil prices.

Forecasts for oil disappointing

Experts point out several factors that can break over the past three months the rise in the oil market. Prices rose by as much as 65% from 13-year lows recorded in February 2016.

First, this trend could undermine Britain’s decision on withdrawal from the EU. “Breaksit can cause a cascading effect if other economies would be dragged into chaos, it will inevitably affect the demand for oil” – analyst Barclays Plc Movin Mahesh, writes the WSJ.

In fact, oil has fallen in price by almost 10% since the referendum in the UK, held June 23, on the backdrop of withdrawal of investors from risky assets, which include commodities. Many believe that Breaksit will trigger a recession in the UK and will significantly weaken the recovery in the rest of Europe. So, according to a forecast by Barclays, the result of a British exit from the EU will be a decline in global demand for oil by 100 thousand barrels per day in 2016 and 2017.

Despite the fact that this reduction is negligible when the total demand of 96 million barrels a day, the reaction in oil prices can be disproportionately harsh, as is usually the case with the deterioration in market sentiment, writes the WSJ.

Also the oil market may suffer from the strengthening of the U.S. dollar, also observed as a result of Brexia. Oil prices are denominated in dollars, and a strengthening U.S. currency makes oil more expensive in other currencies.

Finally, another risk for the oil market is a recovery of production in the regions where the previously noted disruptions in shipments, including Canada and Nigeria, as well as slowing the rate of decline in production in the United States, where in recent weeks the number of active drilling rigs.

The consensus forecast of 14 investment banks polled by The Wall Street Journal, suggests that this year the average price of oil grade Brent will be 45 dollars per barrel, WTI – $ 43 per barrel in 2017 Brent will cost an average of $ 57 per barrel, WTI – $ 55 per barrel.

Short-term forecast from the IMF, released Friday, also disappointing: in 2016, and next year the average price of oil will rise to the level of $ 42 per barrel, and in the long term – to $ 51.

The recipe of high oil prices from IMF

The international monetary Fund said at the same time he knows the proper way to raise oil prices to 75 dollars per barrel by 2020. This can be achieved if OPEC will cut production by 7 million barrels per day, reducing their global market share from 42% to 35%, the IMF said.

If OPEC continues to hold production levels to maintain their market share, the price of oil by 2020 will amount to only 58 dollars per barrel, experts predict the Fund.

The IMF, controlled by Washington, is trying to put pressure on the cartel. OPEC is playing against oil production with a higher level of profitability, which needs a high oil price. Including under attack by American shale oil (together with the Venezuelan, Norwegian and even Russian oil on the Arctic shelf).

“Currently, OPEC produces about 32 million barrels per day. Thus, the IMF is said to reduce the production by 20%. This is a large amount, and the cartel will not do it under any circumstances, and will not agree to reduce the share of 7%,” – says Anna Kokoreva. Moreover, in her opinion, a change in the strategy of OPEC is not a guarantee that the market will return to balance. “In fact it turns out that the cartel will relinquish their market share to someone else, for example USA or Russia. In this case, neither of which the growth will not speak”, – the expert believes.

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