Prolonged Weakness Ahead in Energy

The resumption of the bearish trend in crude oil saw a temporary respite in the middle of the week as the FOMC Statement sent commodities soaring after the US dollar tumbled lower.  Having since retraced most of the losses, the dollar continues to be a main driver of commodity prices, however, somewhat less responsive than the momentum witnessed during the Fed event.  The brief surge in crude oil was relatively short-lived as inventory data and production figures crushed expectations of a near-term rebound in prices.  The 5% move higher in West Texas Intermediate crude oil had a half-life of just 8-hours with prices resuming the prevailing downtrend.  The release of API and EIA crude inventories data showed that estimates of US storage capacity filling by June might be overly optimistic as the present rate of production suggests spare capacity might be conceivably filled by May.  Inventories more than doubled expectations of a 3.750 million barrel build as producers in the US continue to ramp up output.


Adding to woes in crude oil prices was commentary from Kuwaiti Oil Minister Ali al-Omair who stated that “OPEC had no choice but to keep output steady.”  Furthermore, he mentioned that “we don’t want to lose our share in the market.” As prices continue to drop, they not only severely impair oil economies, but also threaten price wars as these countries seek to protect their contracts with buyers.  In order to protect market share, producers will drop prices further as evidenced by the latest move by US shale companies which were recorded as selling some output for as low as $37 per barrel earlier this week.  High output, expanding production, rising inventories, and lacking demand are all indicative of further price weakness in the pipeline.  With no nation experiencing expanding demand, fundamentally prices should continue to fall in coming weeks until all the marginal producers have exited the market due to default or bankruptcy.