Oil firms a little, but don't be too quick to jump in, US equities higher, ASX futures up 24 points

Commodity markets have taught a lot of traders not to catch falling knives over the past few years, with seemingly bottomless down-trends in iron ore, copper and oil punishing those who choose to ignore the old 'trend is your friend' adage. Of course there is the extended version of that adage, being 'the trend is your friend until it bends,' which is why speculators will be quick to rush back into beaten up commodities if they believe that change is in the wind. We saw this in oil markets (see first chart) early this year, when Brent crude prices edged below US$50 per barrel, hitting a low of around US$46.50 before price consolidated and then jumped back up as traders figured it had hit a major low, eventually rising to US$68.50 in May - a 47.3% jump in four months.

If you look at today's second chart, you'll see that WTI crude (OILUS in the Rivkin Trader platform) has ticked higher in the last couple of sessions to bring it's price in line with Brent crude (OILUK), with both markets trading within 20c of each other. The front month for WTI has rolled from January to February around the same time as the US lifted an oil export ban, and this seems to have been a catalyst for buying that is pertinent to WTI only, while Brent's down-trend remains unwavering.

These short-term dynamics might cause some optimism for those on the watch for cuts in US inventories, and admittedly a very mild November and December would have dampened demand recently and this could snap back a little if harsher weather arrives in Jan/Feb. However, the big global story for oil supply could still get some more bad news in 2016 if Western sanctions against Iraqi oil are lifted, which would add to the existing 1-1.5 million barrels per day that OPEC is producing beyond its own target. There was a lot of talk earlier in the year of a lack of investment and infrastructure that might limit Iraqi oil supply, but with the capacity to produce over 4 million barrels per day, Iraq is within close range of being able to produce half of what Saudi Arabia does - so with a stated global demand for OPEC-produced crude standing at just under 30 million barrels per day and production already exceeding that by about 1.5 million barrels per day, Iraq has the potential to further increase supply growth, putting aside the question of what happens with higher-cost onshore production of oil in the US.

Now this all sounds a bit gloomy, but for net importers of oil it's great news. It's great news for China, really great news for India, helps the back pockets of Australians and--with the bulk of Australian corporate exposure sitting in the already-beaten-up Woodside, Origin, Oil Search and Santos--it will help keep the running costs of mining, mining services, shipping and transport low. It will also keep downward pressure on interest rates due to its dampening effect on inflation, and this could buy the Aussie housing market some time to drift sideways for a few years and lose its 'bubble' status. A 20% drop in the price of petrol will equate to a $500 saving for the average Australian household, and I think this is a factor that is probably overstated a little - especially if consumers are inclined to save rather than spend, and that depends on confidence.

Keeping in mind that there are global over-supplies that are sufficient to keep oil at current prices or lower for a long time, I don't mind the idea of buying Caltex (CTX) on dips to the low-to-mid A$30 level, given its ability to sell off on short spikes in the oil price and then rally when oil is driven lower again and the usual lag between lower oil prices and stubbornly-high gasoline prices emerges at the pumps. 
  


Source: Rivkin, Saxo Bank

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This article was written by Scott Schuberg, CEO of Rivkin Securities Pty Ltd. Enquiries can be made via info@rivkin.com.au or by phoning +612 8302 3600.

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