Wednesday, January 7, 2015

Brent dips below $50 for first time since May 2009

The price of Brent crude temporarily fell below $50 per barrel on Wednesday morning for the first time since May 2009, as fears of weak demand and a glut in global supply continued to weigh on sentiment.

Brent crude for February delivery was trading at $49.99 a barrel at around 7.55 a.m. GMT on Wednesday, before ticking slightly higher. It marked the first time since May 1, 2009 that it had traded below the key $50-per-barrel mark.

The benchmark has continued to hit fresh 5-½-year lows this week along with U.S. crude, which has fallen below $48 and was trading at $47.17 on Wednesday morning.

The commodity price has become a leading indicator for asset markets, with a dip in price roiling stock markets over recent sessions. It has also led to a flight to safety, with the yield on the U.S. 10-year Treasury falling below 2 percent on Tuesday for the first time since October.

Production cut needed?

Weak global demand and booming U.S. oil production are seen as the key reasons behind the price plunge, as well as OPEC's (Organization of the Petroleum Exporting Countries) reluctance to cut its output.

While a lot of focus has been on Saudi Arabia's resistance to any cut in production, Sabine Schels, senior director and global commodity strategist at Bank of America Merrill Lynch Global Research, said she believes that non-OPEC countries now need to act to stem the free-fall.

"We're really nowhere near what we need to see," she told CNBC Wednesday, saying that firms in countries like the U.S. are cutting expenditure but are not yet dialing back on oil production.

Brent Crude is a global benchmark for the commodity which compiles prices of light crude from 15 North Sea oil fields in Europe. The last time the benchmark closed a session below $50 a barrel was on April 28, 2009.

'Good news' for equities

Andy Buchanan | Reuters

Trevor Greetham, an asset allocation director at Fidelity Worldwide Investment, said he believes the dramatic drop in oil prices - which have collapsed by around 57 percent since mid-June last year - was broadly positive for the global economy in the medium term.

"It's actually a good news story for equities in the medium term," he told CNBC Wednesday, arguing that the global economy wasn't weak, with the U.S. rebounding strongly since the global financial crash. A lower oil price would accentuate that recovery, he said.

However, the fall might lead to some financial stress for oil companies, he conceded, and the banks that lend to them.

Neil Dwane, a CIO for European equities at Allianz Global Investors, agreed with Greetham, but was cautious on whether the price fall would really translate into an economic boon, with consumers rushing to the pumps.

"It's too earlier to tell, even in the U.S.," he told CNBC Wednesday.
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