Since the topic of the ECB holding the markets in suspense for a month relegated to the second place, and before the FED meeting, which all seems to be clear with, there is one more week left, the market watchers got oil prices in the spotlight as they accelerated the decline after yesterday it set new lows since 2009. On Monday oil fell in price by 5%, and on Tuesday it lost nearly two more percent. Today’s morning attempt to correct the price failed, and now the quotes of Brent mixture broke down the psychological barrier of 40.00 per barrel and is now at 39.94. Such dynamics of oil can have a profound psychological impact on the market. Falling prices for Brent crude oil below $40 will force some traders to refrain from transactions before the FED decision on interest rates.
“Brent oil looks very independent at the moment, – said Michael Nielsen, a senior trader at Global Risk Management. – I abstain from betting until the FED decides.” Norbert Rücker of Julius Baer warns against so-called “bottom search”, when investors buy at prices that, in their opinion, have found the bottom and will soon recover. Rücker believes that the price recovery will not come soon, given the continuing oversupply. The oil market has become a self-regulating after OPEC has officially admitted its impotence by eliminating quotas at the meeting on Friday.
“Oil prices are going to set the direction of the currency market before the meeting of the FED, – said an analyst at Mizuho Bank Keisuke Hino. – The rate on the drop of the raw material exporters’ currency seems logical, but it is necessary to pay attention to how much more the oil quotations will drop.”
And the expert is really right if you now look at the quotes of the Canadian dollar, which is quite reluctant to respond to the better-than-forecast data on permits for new construction in the country.
However, the Organization of Petroleum Exporting Countries (OPEC) decision to maintain production at a high level adopted on Friday will be a strength test for the producers outside OPEC. Olivier Jakob of Petromatrix admits that current prices are below the so-called “shale range” which is $ 45-65 per barrel, where the extraction of shale oil is profitable. December’s average WTI oil price is likely to drop below $45, increasing the pressure on producers of shale oil, he said. The US Department of Energy predicts that shale oil in the country in January will be reduced by 116,000 barrels.
In addition to the OPEC decision, oil prices have felt pressure by the weak Chinese trade data. A more serious, than it was expected, decline in China’s exports in November by 6.8% weakened the hope that the second largest economy in the world will be able to stabilize in the fourth quarter, worsening the situation of China’s trading partners. “All of this is a reminder of the weak China’s macroeconomics, which affects the global situation, as we have seen with the fall of oil prices, when no one is ready to reduce the offer,” – said the head of the Department for the Study of Emerging Markets Commerzbank Simon Quijano-Evans.
Grant Smith’s brief review on what happens in the world of oil today can be found on Bloomberg Business.