Date
23 May 2017
Oil prices rebounded late last week as many parts of the world were swept by severe cold weather. But the bounce is proving to be transitory. Photo: Bloomberg
Oil prices rebounded late last week as many parts of the world were swept by severe cold weather. But the bounce is proving to be transitory. Photo: Bloomberg

Why the outlook for oil prices remains grim

An unusual cold wave sweeping across many parts of Asia and North America helped oil prices stage a sharp bounce on global markets last week.

The rebound may have also stemmed from perceptions that the sector could be reaching a bottom.

Although sanctions against Iran have been lifted, paving the way for Iranian oil to flow to global markets, downward pressures on energy prices appeared to have abated.

The two major oil future prices climbed to above US$30 last Friday.

Amid signs that quantitative easing measures in Europe and Japan could be expanded, the market expects the Federal Reserve to slow its pace of interest rate hikes.

January crude oil futures were once traded at US$26 recently, marking an oversold status. So I believe technical factors also fueled the rebound.

But I have to say that the rebound will not last long, a conclusion that is already borne out by the oil movements on Jan. 26.

As I said before, the positive factors are transient and the demand-supply situation hasn’t really changed much.

Generally speaking, demand for energy will increase in winter. However, due to El Niño, this winter has been warmer than usual overall.

While the current cold snap may boost energy demand for a while, the overall situation does not inspire confidence.

Moreover, there is little chance that a fresh cold wave will strike again before spring.

Given these factors, I believe the downward risk for energy prices is significant. Changes in inventory by the end of the winter may potentially trigger another slide in the market.

When Iran returns to the international market, one should keep a close eye on how the new supply would affect inventory level. That will have a significant bearing on the oil price trend.

Meanwhile, the Fed’s March meeting will also be a cause of volatility in the market.

I believe crude oil prices may even drop to below US$26.19. For the short term, the closest resistance level is US$35.

This article appeared in the Hong Kong Economic Journal on Jan. 26.

Translation by Myssie You with additional reporting

[Chinese version 中文版]

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MY/DY/RC

Vice president, ADMIS Hong Kong Limited

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