Crude oil prices hit by glut and Fed interest rate hike

Crude dropped below US$35 a barrel yesterday, squeezed on one side by a massive oversupply and a rising US dollar on the other.
Crude dropped below US$35 a barrel yesterday, squeezed on one side by a massive oversupply and a rising US dollar on the other.PHOTO: BLOOMBERG

Under-US$35 level not seen since 2008 financial crisis; prices expected to fall further

The move to increase United States interest rates for the first time in almost a decade has done nothing to help the plight of oil, which has dived to levels not seen since the 2008 global financial crisis.

Crude dropped below US$35 a barrel yesterday, squeezed on one side by a massive oversupply and a rising US dollar on the other. The greenback has been bolstered by the Federal Reserve's move this week to increase rates by 0.25 percentage point, further reducing the investment appeal for commodities, which have been plunging in price for the past 18 months.

"Oil futures are typically priced in US dollars, so a stronger US dollar will make oil more expensive," said IG market strategist Bernard Aw.

But he added that the persistent glut is the primary and underlying reason for the prolonged weakness in oil prices, coupled with softening demand, especially from China, which is grappling with its own economic slowdown.

 

As of now, there is no end in sight to the oversupply, as the Organisation of Petroleum Exporting Countries (Opec) failed to agree on slashing output or even a production ceiling at its most recent meeting on Dec 4. De facto leader Saudi Arabia stood firm on its stance of maintaining output to keep market share and drive out higher-cost producers, while Iran is insisting on raising its oil output once trade sanctions are lifted soon.

US crude inventory continues to rise too, adding to the oversupply. It has surged to 490.7 million barrels, the highest since the 1930s.

Goldman Sachs has warned that oil prices will likely fall further, predicting that they will hit US$20 a barrel. Moody's Investors Service said in a report this week that "a prolonged period of oversupply will keep oil prices lower for longer".

This is good news for Singapore consumers as it means imported goods will remain relatively cheap and petrol pump prices will stay low, but it is a bleak outlook for oil-exporting nations, including Malaysia and Indonesia.

Their currencies have been battered by worries that low oil prices will hurt economic growth. This, in turn, has raised concerns that it will be harder for the governments and firms in the two nations to pay off their foreign currency debt.

Mr Aw said one way to reverse the downtrend is by slashing global output. However, "this is clearly quite unlikely, given a recalcitrant Opec", he said.

The US is doing its bit - the government is on the verge of lifting its 40-year-old ban on oil exports, which could ease growing stockpiles and lend support to oil prices.

But Mr Kelvin Tay, UBS Wealth Management's chief investment officer for Southern Asia-Pacific, is sceptical. "A reversal in oil price decline would come about only if production levels in the US start to taper off and demand stays constant or starts to increase, which is unlikely given the tepid growth rates of the global economy."

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A version of this article appeared in the print edition of The Straits Times on December 19, 2015, with the headline 'Crude oil prices hit by glut and Fed interest rate hike'. Print Edition | Subscribe