The energy pack has witnessed steep liquidation during the course of June and weakness has aggravated at the onset of the July as well. The decline has been quite steep in both WTI and Brent, with values approaching the lows of US$50/bbl and US$55/bbl respectively. Greek jitters, Chinese turmoil and most importantly probability of a resolution on Iranian issue have weighed on the complex. Iran and the five permanent members of UN Security Council plus Germany have extended the nuclear consensus deadline. There has been some progress on the negotiations, with Iran giving consent to the condition that would allow international inspectors to gain some access to its nuclear facilities before sanctions are lifted. There is a strong indication that a deal on Tehran’s nuclear program is on the anvil.
On Greece front, the crisis has escalated, wherein the nation has voted a ‘No’ in the referendum, rejecting the creditor’s demand of spending cuts in exchange of a bailout deal. European officials are not pleased with the outcome, as they wanted the incumbent Greek regime to conform to their demands. A ‘No’ vote can imply end of any massive future aid package for Greece and just keep Greece languishing in the Euro region by providing some money to survive, There is also a possibility that the Greeks will be completely marooned and will be compelled to unfold its own currency. Meanwhile, European officials and IMF await latest proposals from Athens before the July 12th deadline, whereby there are expectations of some meaningful reforms. We doubt whether Greece is going to come out with ideas substantially different from the earlier proposals. The Greek regime will remain persistent with their demands, as they have the backing of its own people, manifested by the outcome of the referendum. Although it is difficult to comment on where the bargaining power is tilted towards, it seems that Europeans are divided between the option of a ‘Grexit’ and a compromise on the debt load.
On supply side, OPEC has been constantly producing above the production quota of 30mbpd, with June output levels reported around 32mbpd. Saudi Arabia has been maintaining optimal production levels and in the process compensating for any production losses emanating from tensions in the Middle East. On numbers, Saudis are producing ahead of 10mbd, while Iraqi output during June is reported around whopping 4.4mbpd. In US, the rate of decline in rig counts has slowed, conveying that the producers are figuring out new ways of attaining a lower cost curve. Supply glut is clearly manifested by the Energy Intelligence Group numbers which state the global markets have witnessed an average surplus of 2.66mbpd during the first five months of 2015. On inventory side, although US oil stocks fell by 12mn barrels during the course of June, the number is not big enough to overshadow the overall supply glut. Build-up over the past few months have taken the total inventories about 80mn barrels above year ago levels.
The aspect of global supply glut continues to take a toll on the sentiment. There has been no meaningful moderation in US oil supply growth, while OPEC continues to produce above the official production quota of 30mbpd. In US, recent decline in crude oil inventories is counterbalanced by sharp rise in stockpiles of refined products. There has been no concrete improvement in demand as well. In addition, Iranian nuclear deal can force the bulls to bite the dust. Iran can boost exports by an additional 1mbpd provided that there is an end to the sanctions on Teheran. Uninspiring global oil fundamentals will deprive the market participants of any upside impetus.