There is a real divergence developing in the oil market which makes predicting future price direction quite challenging. On one side of the Atlantic the market is awash with oil.
According to a Reuters report vessels are sitting off the west coast of Africa and in the North Sea holding millions of barrels of oil for which there are no buyers. Worse, so many vessels are tied up essentially in this floating storage that VLCC (very large crude carrier) freight rates are rising because there aren’t enough vessels available to carry the cargo that is moving under longer-term contracts.
Effects of Floating Storage
This has the effect of making new production more expensive to sell in the Far East and Europe, exacerbating the problem faced particularly by Nigerian producers. According to Reuters, there are around six million barrels of crude from Nigeria’s May program available – some already loaded onto vessels.
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That joins more than 65 million barrels left in June and July for Nigeria alone. Meanwhile in the North Sea, only one VLCC booking has been made to Asia for June, leaving Europe to absorb almost the entire production of the UK Forties field. As mentioned above, the floating storage is putting a stranglehold on new booking rates. May freight rates on the key West Africa to Asia route are up more than 10% Reuters says, roughly 40 cents per barrel higher than April.
Not surprisingly, this has weighed heavily on prices. UK Forties traded at the lowest differential to dated Brent Crude since December 2008 this week, while Norwegian Ekofisk traded at a nine-year low, the paper said.
Prices Actually Going Up in the US
On the other side of the pond, prices are moving in the opposite direction. For the first time in six months, the US oil market is flirting with backwardation, where the spot price is higher than one- or three-month dated delivery – a sign of a tightening market and. potentially. a shortage.
We have already written this year on the risk to the fossil fuel industry posed by potential carbon taxes. Consensus that such taxes are coming seems to be building surprisingly quickly, helped, it must be said, by a historic agreement between the USA and China to work together to agree on emission targets and add momentum for an agreement to emerge from the COPS21 conference planned in December in Paris.
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The most noise is, not surprisingly, coming from fear that trillions of investments in fossil fuels, principally coal but also oil and even natural gas, could become uneconomic if some form of carbon tax is agreed upon. Probably more because of this worry than any more altruistic notion major investors are already beginning to turn their backs on coal in particular. The latest is the world’s largest sovereign wealth fund, Norway’s $916 billion fund has decided this week to pull any investments from companies whose business relies more than 30% on coal according to the FT.
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The crucial point here is “any business,” so not just mining companies but power generators will be hit. The fund says it is trying to alter behavior in these firms, but if you are a major European power generator you have billions invested in coal-fired power production. That is some super-tanker to turn around quickly.
The US dollar index has declined 6% since its peak in mid-March.
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This decline gave a boost to commodities and, of course, precious metals were not left behind. However, their upside moves look anything but impressive. Despite the weaker dollar, it seems as if precious metals are having a hard time moving away from their lows.
Gold prices rose a shy 6% since mid-May. The yellow metal is still near record lows. A bit more encouraging is the move silver is making, up 12% since mid-May. The grey metal, however, is still near record lows as well. The metal is trading at $17.71/oz and we’ll see if it can break medium-term resistance at $18.5/oz.
A bit more encouraging is the move silver is making, up 12% since mid-May. The gray metal, however, is still near record lows as well. The metal is trading at $17.71/oz and we’ll see if it can break medium-term resistance at $18.5/oz.
Platinum is up 7%. A very small movement compared to its huge decline since summer last year. The metal has a long way up to reach last year’s levels.
Palladium rose 8% after making a 1-year low in March. Palladium is clearly the best performer among precious metals but since summer of last year is also being dragged down with the rest of precious metals.
What This Means For Metal Buyers
Recent weakness in the dollar is giving a boost to precious metals. However, these price movements have been quite shy so far. It still makes sense to be long-term bullish on the dollar and bearish on precious metals.