BY Noureldeen Al Hammoury
Crude Oil Rally Fades
Since the beginning of the year, when oil producers decided to discuss the intention to freeze their oil production, crude oil prices recovered dramatically, moving from as low as $26 per barrel during January trading sessions to crossing the $50 threshold towards the end of May. However, the entire recovery in Brent Crude and West Texas Crude has been built on hopes that oil producers would be freezing their production at current levels, hence creating a future shortage versus demand in the market. But these hopes are not built on facts.
Recently, when some of the producers announced that there will be no freeze anytime soon, crude oil prices dropped back. WTI closed early September below $45, losing more than 6.3 percent throughout the first week of this month. For the same period, Brent also closed down around $46.83, a drop by 5.80 percent in one week as well.
What’s Next For Oil?
I would suspect the same scenario which happened throughout the first week of September will persevere. Producers will closely monitor the price action over the coming days, weeks and months. Any depreciation below $40 in Brent Crude would clear the way for all the producers to send out new hopes, remarks and/or statements that the freeze is still on the table.
Fundamentally, there is no clear sign of a notable recovery in global growth anytime soon. Therefore, producers will maintain high hopes to keep prices at current range between $40 and $50 per barrel.
Of course, this is also reliant on the result of the oil producers’ meeting in Algeria this month, be it members of the Organization of Petroleum Exporting Countries (OPEC) or non OPEC members, including Russia, Saudi Arabia and Iran. Circulating news shows an expectation that the producers will agree on freezing their output after Iran reached its production ceiling of 4 million barrels a day.
Iran had previously refused to freeze its production under 3.5 million barrels a day earlier this year, citing Saudi Arabia’s high production level of 10 million barrels as a reason.
However, with new positive political signs emerging such as the kingdom’s Foreign Affairs Minister Adel Al Jubeir calling Iran a “great nation” and asking it to change its policies, and with Iran’s oil ministry saying on September 3 that Tehran is ready to support any decision to help restore balance to the oil market, (but only after it regains its pre-sanctions market share) the anticipation remains high that oil prices may regain some steam, during the coming months. Also, the Russian-Saudi comments that they will work together to stabilize the energy market ahead of OPEC’s meeting in November, has pushed oil prices up by 4 percent on Monday, and the meeting should have positive consequences on the market going forward.
New Economic Measures
Meanwhile, some oil producers have started to face economic challenges, leading to a notable deficit in their budgets. This has led them to think, and even adopt new measures to fend off the situation. Such measures can be seen as a stimulus attempt. For example, Saudi Arabia’s three-month Interbank rate was up for 15 days, rising by more than 50 percent since January.
However, the kingdom is heading towards the bonds market again as it did previously during the global financial and subprime crisis in 2007.
As early as October, Saudi Arabia will be looking to boost its first international debt sale by $15 billion, which might be the largest emerging market sovereign debt issuance in history.
There are reports that the yield on these sovereign bonds will range between 10 percent to 12 percent, in order to attract investors. Furthermore, Saudi Arabia announced on September 3 a new step to attract foreign investments. As per the announcement, foreign funds of at least $1 billion will be allowed to invest in Saudi stocks, and that number has been brought down from a previous threshold of $5 billion, which was seen by many investors as too high. The kingdom is also looking at privatizing minority shares in its successful government-related entities, with initial public offerings that are expected to be the world’s largest. This is another sign that the kingdom is facing notable challenges and is trying to move as fast as possible. But will these measures help? And are they enough? Only time can tell.
Global Investors Rushing To Bonds
Going global and looking at how the world’s largest economy faired, the U.S. Jobs Report, which came out on Friday, September 2, was not encouraging at all. As per the report, the U.S. economy added around 151,000 new jobs, much less than the anticipated number of 180,000. Meanwhile, wages slowed notably, which is not in favor of the Federal Reserve. Such news has led the American two-year yield to decline back to 0.78 percent down from 0.85 percent, while the 10-year yield remained stable around 1.6 percent.
Such report will keep the Federal Reserve away from raising rates in September.
Of course, the question here is not how the Fed or other central banks will react, but rather how long the bonds market can handle such amount of debt and low yield as most of the global yields are approaching the negative mark.
Noureldeen Al Hammoury is an independent market strategist, trader, author and founder of NourHammoury.com.