• After the drastic falls towards the end of 2014, oil indexes started to exhibit some tentative signs of stabilisation since mid-January. Prices traded mainly around mid to high USD40s a barrel in the second half of the month, before breaking decisively above USD50s in the first week of February on the weakening of USD and news of workers’ strikes in a number of US refineries. These strikes, which are currently ongoing, are in response to plans by oil companies to slash spending following the 60% peak-to-trough fall in oil prices since June last year.
• In the absence of any concrete forward guidance by major oil producers on how the global glut can be addressed in the near term, the volatility in oil prices as indicated by the OVX index continued to track at historically-elevated levels, with the short-term trading patterns tending to be guided by any geopolitical news and economic data that would remotely indicate changes to the status quo of a heavily oversupplied global market.
• The oil futures curve has moved into a contango (where forward prices are higher than spot prices) since October 2014 and has steepened over time since then. This typically indicates excessive downward adjustments in commodity prices within a short time alongside the lowering of longer-term price expectations. Contangos in commodity markets tend to be short-lived phenomenon nonetheless.
• The supply responses to the price falls to-date across oil producers have been highly variable and disorderly. A number of producer countries which are heavily reliant on oil revenue to fund their government expenditures, such as Russia and Iraq, have lifted output volumes in a bid to make up for income shortfalls. Meanwhile, US oil crude supplies continue to grow at a robust rate, despite a steady fall in rotary rig count since mid-December.
• Against the backdrop of significant price retreat and a widening contango, there are signs of rejuvenation in short-term physical demand, particularly tanker storage demand by traders in Asia and stockpiling of reserves of major importing countries such as China and India, although not sufficient to make a meaningful dent to the supply overhang.
• Given the above, we have revised our oil price forecast profile lower through 2015 and 2016, with the recovery in oil prices expected to pick up pace in the second half of this year.

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Oil Market Update – February 2015 (PDF, 447KB)