Battered oil sector awaits distant day of reckoning

Crude plummeted to new lows not seen for a decade at the end of December to enter 2016 battered and bruised, as the market fixated on a stubborn and potentially worsening supply glut, and forecasts of a slowdown in world demand growth.

The gloom-and-doom view was reinforced by oil producers Saudi Arabia and Oman unveiling austerity budgets for the new year marked by hefty spending cuts, subsidy reductions, and tax increases.

News of China’s purchasing managers’ index dropping further in contraction territory to 48.2 in December sent global stock markets into a tailspin on the very first working day of the new year, suggesting growing worries over a slowdown in the world’s second largest economy.

On the supply side, attention turned to the lifting of nuclear sanctions on Iran, potentially this month, and the resultant new tide of crude barrels from that country. Though a senior official at the National Iranian Oil Company reassured that Iran would release the initial incremental 500,000 barrels per day (b/d) “gradually” so as not to provoke a further slide in prices, the mere prospect of additional supply hung heavy on a sentiment-driven market.

America lifting export restrictions on its crude as part of a government spending bill signed into law by US President Barack Obama December 18 was a historic move, but not one expected to have much impact on the global market in the near term, especially as the Brent-WTI spread had been consistently narrowing through the last quarter of 2015.

The spread, which flipped to negative for a few days following the US move, can now be expected to remain tight, which ironically, erodes the attractiveness of US crudes vis-a-vis competitive light sweet grades priced off Brent.