Oil prices oscillated in the range of US$92-99/bbl during the course of June. Crude oil prices relatively weathered the storm amid a steep sell-off in various commodities and asset classes. Oil markets are predominately occupied with developments in the Middle East, whereby we have chaotic situation in Turkey and Syria. Although tensions in the Middle East and strong US macroeconomic numbers are providing support to the complex, prices have failed to surpass US$99/bbl. On the supply side, the backdrop does not looks inspiring, characterised by record high inventories in US and expanding global oil supply. Rapid expansion in US energy production has been a potential game changer. Regardless of the fact that OPEC sees a global surplus of roughly 1.5mbpd, the cartel has decided to keep production quota unchanged for the balance of this year. It seems that OPEC is catering to the needs of the smaller members of the group (i.e. Algeria, Nigeria, Angola, Iran and Venezuela) who have witnessed economic weakness amid several months of relatively stagnant oil prices. On demand equation, there have been weak global demand estimates from various agencies including EIA, IEA and OPEC. In addition, the economic landscape in Europe and China has also not been supportive. On supply-demand balance, global oil supply grew by 0.6% on yoy basis during the first five months of this year, while demand weakened by 0.8% respectively. Global oil markets stand at a surplus of an average 2.2mbp during Jan-May 2013 period, as compared with a surplus of an average 0.8mbpd.
At the current juncture, the credit crunch issue in China is haunting the commodity markets. The liquidity squeeze is manifested by the fact that the short term interbank loan rates have skyrocketed. Although People's Bank of China has injected 50bn Yuan (US$8.17bn) into the financial system in order to ease the cash squeeze, the conditions in the Chinese money markets still remain unsettled. Despite a retreat from recent record highs, Chinese short-term interest rates still remain elevated and may impact commodity demand. China’s central bank is reluctant to aggressively ease the liquidity squeeze as it is concerned about over-heating in the economy. The apex body has urged banks to manage their finances in a more prudent manner, elaborating that the focus should be on using credit to aid the real economy. It seems that larger state-owned companies are successful in availing the chunk of bank finance, while the small and medium enterprises are deprived of credit. China’s total credit growth has exceeded the growth in nominal GDP during this year but has failed to bring resurgence in the broader economy. Expanding credit is inflating bubbles like real estate sector and the liquidity is not funneled into the productive areas of the economy.
We believe that geopolitical issues emanating from the Middle East has not impacted the global oil supply. Oil markets are well supplied and effectively OPEC oil output also remains healthy above 30mbpd. Energy prices seem vulnerable at higher levels, as dynamics in oil markets are changing on account of surge in global oil output. Regardless of improving economic landscape in US, growth in global oil demand remains subdued. Needles to mention, pessimism in China and Europe continue to pose as headwinds. Considering the multitude of factors, we believe that oil prices will persist with the familiar price range of US$92-98/bbl in the coming weeks and eventually drift lower below US$90/bbl.