Crude Oil Futures Surge After Closing at Lowest in 12 Years
This article by Mark Shenk for Bloomberg may be of interest to subscribers. Here is a section:
"It makes a lot of sense to cover shorts after plunging to new 12-year lows," said Bob Yawger, director of the futures division at Mizuho Securities USA in New York. "We had one of the more reliable people in OPEC say that it was willing to cooperate in making cuts. I don’t believe anything will come of it but you have to pay attention."
And
“Prices are not appropriate, I won’t say for the majority only, but for all producers,” U.A.E.’s Al Mazrouei said in the Sky News Arabia interview in Arabic on Wednesday. “The people who have spent money and have this investment, it’s natural that they won’t make cuts alone unless there is complete cooperation from everybody in that area.”
Oil is cheap right now and many producers are uneconomic at these levels. The question then is only about when this supply will be taken out of the market not if that happens. The lower prices go, the greater the potential is for that to happen. Russia signalled in January that it was willing to discuss cutting supply and now several OPEC members are discussing it which is a confirmation they are not immune to the decline in prices. These prognostications are helping oil prices to steady but substantive action is probably needed to act as a catalyst for a more impressive rebound. A lot will depend on what Saudi Arabia is willing to do.
There is quite a divergence between Brent and West Texas Intermediate at present. Headlines talking about oil prices falling to new 12-year lows referred to WTI while Brent may currently be posting its first higher reaction low since September.
Low oil prices have been a major factor in the underperformance of the mining sector. Energy is a major consideration in the total cost of production for miners and low prices have allowed marginal producers survive longer than might otherwise have been the case. Any additional strength in oil prices would pressure that marginal supply and allow the majors to benefit. This means mining companies are heavily influenced by oil prices and helps to explain the rallies today in BHP Billiton, Rio Tinto, Anglo American and Glencore. The potential for mean reversionary rallies following what were accelerating declines appears to be gaining ground.
