Crude Oil

The free fall in oil prices have made ‘energy’ the most talked-about sector of the entire market in 2015, apart from the fact that its performance has been the worst. Year-to-date, ‘The Energy Select Sector SPDR’ has posted a loss of 25%. On the other hand, the broad-based Dow Jones Industrial Average (DIA) and the S&P 500 index (SPY) shed just 12% and 9%, respectively, over the same period.  

As of now, crude has experienced a bounce back after hitting a new 6-1/2 year low of $37.75 recently, and a short spike that saw the commodity scale a year-high of $61.43 per barrel in June.

Oil is facing the heat on several fronts. Perhaps, the most important of them pertains to the mounting worries about China’s crude demand. In particular, the Asian giant’s currency devaluation has stoked speculation about soft economic growth in the world’s No. 2 energy consumer.  

What’s more, in the absence of production cuts from OPEC, the effects of booming shale supplies in North America and a stagnant European economy, not much upside is expected in oil prices in the near term. Moreover, a stronger dollar has made the greenback-priced crude more expensive for investors holding foreign currency. The Iranian nuclear framework agreement, which has the potential to release more of the commodity in the already oversupplied market, has put the final nail in the coffin.

As it is, with inventories near the highest level during this time of the year in 80 years at least, crude is very well stocked. On top of that, OPEC members (like Saudi Arabia) have made it clear time and again that they are more intent on preserving market share rather than attempting to arrest the price decline through production cuts. Therefore, the commodity is likely to maintain its low trajectory throughout 2015.

This has forced the oil companies and associated service providers to make deep cost cuts by reducing their workforce. Oilfield services behemoths like Halliburton Co. (HAL – Analyst Report), Schlumberger Ltd. (SLB – Analyst Report) and Weatherford International plc (WFT – Analyst Report) were the first to respond to the worsening situation, announcing substantial redundancies earlier in the year. Of late, they have been joined by integrated majors including Royal Dutch Shell plc (RDS-A – Analyst Report) and Chevron Corp. (CVX – Analyst Report).

In the medium-to-long term, while global oil demand will be driven by China – which continues to be the main catalyst to liquids consumption growth despite the current slowdown – this will be more than offset by sluggish growth prospects exhibited by Asian and the European economies.

In our view, crude prices in the next few months are likely to exhibit a sideways-to-bearish trend, mostly trading in the $40-$50 per barrel range. As North American supply remains strong and demand looks underwhelming, we are likely to experience a pressure in the price of a barrel of oil.

Natural Gas