Oil continues to be weighed down by global economics

Brent crude was holding just above US$47 with WTI priced above US$45 a barrel.

oil barrels in a stack
Brent crude is trading close to its support level

The state of the global economy was the key focus this week as oil refinery demand was low and little positive news impacted the market.

In early trading on Friday, Brent crude was holding just above US$47 with WTI priced above US$45 a barrel.

The more positive June employment figures from the US eased the market somewhat, but Jason Schenker, president of Prestige Economics says “all that glitters is not gold,” adding that he still expect a “US recession to begin in late 2016 and carry into 2017.”

In the short term, he sees more upside, because the report was much stronger than expected.

The ongoing uncertainty of the global economy continues to weigh on the direction of the oil market.

The fallout from last week’s Brexit and the decline of sterling are not having a direct negative effect on the movement of the oil market, but the volatility is not welcomed.

The technical analysts see US$45 as a key support level for WTI with fears if it falls below this, then it could head lower to US$43 a barrel.  Brent crude is trading close to its support level also.

Inventory draw-downs needed

The market needs to see more US inventory draws to help support any strength in the price.

The data this week did not deliver great long term confidence as the US government reported a weekly draw in crude oil inventories that was lower than many analysts had expected, with stocks falling just 2.22 million barrels to reach 524.35 million barrels, according to the Energy Information Administration.

American crude oil production is estimated to have fallen by more than 12 percent since its 2015 peak to now average less than 8.30 million barrels a day. This is the lowest production figure since June 2014.

The sense of balance coming back to the market needs a stronger end-of-driving-season push and a sustained easing of over-supply.

Down from more than a million extra barrels, analysts at some of the investment banks are now looking at a tighter oversupply of only 350,000 barrels a day. Refined products remain strong with excess gasoline on the market.

Lower demand growth in longer term

The leading global management consultancy firm McKinsey Global Institute says its latest research “suggests lower long-term growth in demand for oil than previously forecast,” and cautions the industry to take “a fresh, critical look at energy investments.” 

The study says that “peak oil demand” may have happened already when it comes to fossil fuel as the world depends on growth from emerging and developing economies.

Reduced macroeconomic growth is the key concern as “growth in global energy demand will decelerate to 0.7 percent per year through 2050, a rate 30 percent slower than we had previously forecast.” 

The good news is that fossil fuel will dominate the energy mix until 2050 with growth in gas and renewables also leading the way.

US non-farms an unexpected gift

The growth in US employment figures for June was certainly an unexpected gift to the markets, adding strength to the dollar and improving sentiment.

The next step needed will be a stronger rebalancing of the fundamentals to help encourage investment and add stability to a damaged and fragile oil market.

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