Fundamental Valuation Of Oil Seems Difficult Under The Current Environment

  • Nov 26, 2018 AEDT
  • Team Kalkine
Fundamental Valuation Of Oil Seems Difficult Under The Current Environment

The crude oil prices have been softening since the past few weeks and the WTI & Brent crude is trading at around $51 and $60 per barrel, respectively. The Kingdom of Saudi Arabia has a lion’s share in the OPEC’s oil production with one-third of the same coming from the country and is the foremost supplier of Crude Oil.

If we look into the market dynamics at present, the oil market seems to be extremely tight with a large increase in Saudi production. 

The earlier expectations were that Iran was not going to get any kind of waivers from the sanctions which were put on it by the Trump administration stating that the nations who would be importing oil from the middle east nation will have to face the consequences from Washington, due to this reason the Saudi exports rose to a new high. However, taking a U-Turn on the same the white house has exempted 8 nations now (i.e., India, China, South Korea, Japan, Italy, Turkey, Greece & Taiwan), recognizing the effort these nations have taken to cut their oil imports from Iran. This development has created an imbalance in the whole Oil dynamics & thus created an oversupply of oil suddenly in the market. And hence if the crude oil needs to stabilize in the near future the OPEC will have to take this additional supply of oil off the shelves from the market. However, a cut in the production doesn’t seem to imminent in the coming months as various gulf economies thrive only upon the proceeds from the export of the crude that they derive from their oil wells. On an approximate basis, it would take around 1.4 million barrels per day to take off from the shelves so as to stabilize the falling crude oil prices.

Now coming to the demand aspects, the trade war between the US and China has started to demonstrate its adverse impacts on the world economy. To corroborate this, the global producers have started destocking their inventories as they are in a fear that the trade war is going to slow down the world economy in a big way imminently and hence the energy requirements are slated for a slow down due to this. As the oil markets are forward-looking markets these developments are getting priced in into the current oil valuations. Moreover, going further the demand growth for crude is going to be stunted underpinning the fact that of the weakening of Emerging market currencies against the US dollars which has already started showing the signs of softening of demand from these emerging economies. Also, we have been seeing a lot of supply coming in from the nations which were earlier expected to have a slacked oil production to double it up the US shale gas output is on an all-time high leading to the cause.

Due to all the developments from the Washington front regarding the US president’s urge to the Kingdom for bringing down the oil prices and also considering the market dynamics for crude prevailing currently, the Saudi Arabian Energy Minister Khalid al-Falih said that the nation would work for the advancement of a balanced market but at the same time also mentioned that an oversupply position also is not healthy for the markets. In our view, the downturn in the global markets may also weigh heavily on the oil prices as the downturn raises the concerns for the oil demand. Considering this, the fundamental valuation of crude oil seems increasingly difficult as of now due to the fact that presently the oil prices are being driven by increased market news flow from the global political arena despite the basis of underlying fundamentals.


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