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Fundamental and Technical Analysis
Subsidy cuts by Saudi Arabia in order to mend the hole caused by low oil prices: Oil dependent Saudi Arabia has announced that they would reduce energy subsidies which would cause an increase in utilities and fuel prices over the next 5 years. There would also be an introduction of tax to tobacco. In addition to this, there would likely be spending cuts and also privatization of state-owned entities. All this is probably an attempt to fill the hole that lower oil revenues have left most oil dependent countries. When most of these countries have budgeted for $60/barrel oil, the current rout has more or less left a void in their national reserves.
Both WTI and Brent fell 3.5% yesterday putting an end to its spectacular rally last week. Although we expect most of this to have come from corrections due to the rally last week, this could have been sparked by weak Japanese data that was released yesterday. We do not often see Japanese data impact oil prices this much; however, in the absence of much major news, even the minor ones shake the market. Nevertheless, we do not expect this to continue on to today. With volumes remaining thin, we expect the market to be extremely quiet. This would also mean that major supports should not be broken. WTI and Brent Feb’16 should be facing high levels of resistance at the moment, however, if they break $36.89 and $36.76 respectively, we take that as an indication that prices would be moving higher for today.
Spreads continue to hold above $0, however, can see that front month spreads are reluctant from moving higher. This should be because there have not been much concrete plans for US crude oil to be shipped overseas yet even when the ban has been lifted. This is also probably why front month spreads are much lower than the later months. Eventually, we expect to see WTI-Brent spread to reach about $1 which was at where spreads were before US ramped up its production.
Prices increased again by more than 7% and also an increase of 23.5% increase in 2 weeks. This should be due to the sudden change in forecast of colder weather ahead for the US. This prompts an increased usage of natural gas during winter and thus, an increase in natural gas prices. However, with the market moving ahead to price this in, we remain skeptical if this rally could last. We would unlikely be seeing a sudden drop in natural gas inventories and thus, would think that the rally would be stopped by relatively disappointing US natural gas inventories. On top of this, it is possible that the market is pricing in increased geopolitical conflicts between Russia and Turkey in Feb’16 which would increase the demand for US natural gas. This is similar to what happened earlier this year when Ukrainian conflicts intensified. (Read Report)
Source : Phillip Futures Pte Ltd