January has seen a continuation of the volatility that was seen in the third and fourth quarters of last year. However, despite substantial drops in the middle of the month, equity markets ended the period relatively flat.
Oil has experienced further drops across January, touching a low of $26.55 on WTI and $27.10 on Brent. Prices climbed back up substantially from these lows, to levels around $34 a barrel. However, this move upwards seems to be based on market speculation and we expect to see prices fall again in the near term. We believe that oil will bottom out in the mid 20’s, before rounding sharply in the second half of the year. While prices of $27 a barrel are below the marginal production costs for many wells, it is important to remember that these are prices of high grade crudes. Lower grade crudes that make up much of the world’s production, are trading at much lower prices. Last month North Dakota Sour Blend, was trading at a negative price of -$0.50. These low prices should mean that many wells around the world begin to shut down later this year, helping to restore balance to the market.
In addition to this, there is now talk from Russia about joining OPEC in making a 5% production cut. This offer has been rebuffed by OPEC members. However, it will be in all of their best interests to get a deal at some point. A 5% global production cut would see prices quickly move in the $80 a barrel range.
Data from China continues to weigh heavily on the minds’ of most markets. However, many underlying indicators such as house prices and car sales, seem to be indicating that the economy has returned to stronger growth. Other figures such as the Purchase Managers’ Index data, indicate recessionary pressures inside the country. It is hard to tell which sets of data are correct and this uncertainty is one of the principal reasons why the markets have experienced heavy volatility.
The first quarter will remain volatile, however it looks increasingly unlikely that the world is headed into a recession in 2016. This should translate into higher values across all asset sectors by the end of the second quarter.
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Kuala Lumpur : Malaysia