WhyItMatters

Oil price still on slippery ground

Oil looks set to remain as important a theme in 2016 as it was in 2015.

A global supply glut and tepid economic growth combined to weigh on prices last year, and they are poised to remain depressed this year, occasional blips aside.

One such blip occurred on Monday in the year's first trading session amid mounting tensions between Saudi Arabia and Iran. The price of benchmark Brent spiked about 3.5 per cent in early trading on Monday, after relations between the two major Middle Eastern producers deteriorated following Riyadh's execution of a prominent Shi'ite Muslim cleric.

Prices have since eased because ''the market is still focused on the over supply issue'', said UOB senior economist Alvin Liew. Global oil bench mark Brent was trading at about US$37 yesterday, after reaching a high of US$38.50 on Monday.

Major producers fighting for market share have been relentlessly pumping oil. Countries like Saudi Arabia and Russia appear determined to keep output high.

Expectations of more barrels coming on stream from Iran have also been a key factor in oil's tumble, as Western sanctions on buying its oil are expected to end this year.

On the other side is slowing demand for oil, especially in China, where economic growth is moderating.

Oil could fall to as low as US$20 a barrel before producers start making significant production cuts, according to Goldman Sachs forecasters.

Phillip Futures investment analyst Daniel Ang said the timing of a price rebound would depend on when the oversupply subsides.

The earliest this might happen is in the fourth quarter,by which time global demand might pickup sufficiently to overtake supply, he added.

Meanwhile, geopolitical tensions remain an unpredictable factor and will contribute to further volatility.

A version of this article appeared in the print edition of The Straits Times on January 06, 2016, with the headline 'Oil price still on slippery ground'. Print Edition | Subscribe