Brent Re-Enters Bear Market
Alvexo | Jul 28, 2015 11:21AM ET
After the spectacular rebound in oil prices following the rout that transpired earlier in the year, the Brent benchmark has once again entered a bear market, defined as a drop of 20% from highs. Recent CFTC reports show that the tide is turning against crude oil with the pace of long position exits accelerating at a near record pace. This move coincides with a pullback in hedge funds long precious metals as well as commodities broadly experience the deflationary forces that major economies have been narrowly able to avoid to date. Although developed economies are beginning to show the first signs of improved growth confirmed by the uptick in UK GDP and projected rise in the second quarter US preliminary GDP reading due Thursday, there remains a prickly set of factors holding back accelerated expansion. Concerns are mounting that Asia could prove the epicenter of another global downturn as the Japanese and Chinese economies face mounting headwinds while Australia suffers the brunt of weak commodity prices.
Brent has downside pressure coming from all angles. Whether speculative positioning in the futures market or continued price competition amongst producers in the spot market a multitude of factors are working against any protracted rebound in energy prices. The fact that the spread between Brent and WTI is once again narrowing towards the level of parity between the key global benchmarks is another worrying sign for producers. The last time the spread collapsed, prices also tumbled indicating another round of price weakness is around the corner as supply continues to widely outpace demand. With OPEC and the United States continuing to produce oil at near record levels while the global economy lacks any demonstrable uptick in demand, equilibrium prices are likely to be discovered at much lower levels. While oil at $20-25 per barrel seems unlikely at this point, another $10-15 point drop from current levels is not inconceivable considering the market dynamics and more broadly the disappointing global economic outlook.
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