Oil markets slump back as risk-driven spike recedes

Oil markets slipped back into the red on Friday, as the overnight geopolitical risk-driven price spike failed to provide meaningful support to prices.

At 15:30, the Brent front month futures contract was trading down $1.64 or 2.8% at $57.55 while WTI was trading down $1.55 or 3.0% at $49.88.

Both benchmarks spiked early in Asian trading on Thursday, following reports of Saudi Air Force attacks on Yemen’s Shia Houthi fighters allegedly supported by Iran.

Yemen itself does not cut much clout with oil markets as the country’s oil production is less than 145,000 barrels per day (bpd). At present, the market is evenly poised for two very different reasons. In the event that nuclear talks with Iran end on a note of agreement, the country has some 32m barrels of crude oil stocked up offshore for near immediate sale, according Middle Eastern newspapers.

However, analysts at Goldman Sachs reckon the said barrels won't come into play until much later on in the year, in the event of an agreement.

While Iran has potential to flood the market, should Yemeni troubles escalate and get entrenched, fears will arise for the security of Bab el-Mandeb Strait, a shipping artery linking the Red Sea to the Gulf of Aden.

Many traders remain nonplussed, with one opining that the market was “clutching on to straws” in a bid to reverse the bearish impact of persistent oversupply. Since July 2014, Brent, viewed by the wider market as the global proxy benchmark, has lost 50% of its value.

At present around 1.3m bpd of excess oil is hitting the market. Market commentators believe unless the level falls to around 600,000 bpd, other factors including geopolitical risk, seen over the past few days would not have much of a bearing barring being a “major incident.”

Since Saudi Arabia’s strike on Yemen isn’t quite “major” yet, there was little to support Brent above $60 and WTI above $50, as supply-side pressures and stable demand conspired to neutralise the geopolitical risk premium on Friday.

Technicals aren’t all that convincing either. Dmytro Bondar, technical analyst at RBS, said while the bearish flag pattern was briefly negated by Saudi air strikes, which turned the near-term view to $50-64 range, the long-term view did not materially alter.

“I believe that spikes will remain capped by $65 and the price will re-test the $45/42 support. We therefore close the short trade flat for now and await further developments,” he added.

Meanwhile, none of the three major ratings agencies – S&P, Fitch and Moody’s – predict the market situation to improve over the short term for the benefit of credit profiles of oil and gas companies rated by them. In fact, Moody’s told Sharecast that it expects negative and lower corporate ratings to increase over the course of this year as falling oil prices trigger downgrades.

Julia Chursin, associate analyst at Moody’s, said the number of companies on its “B3 Negative” and "Lower Corporate Ratings" List reached a two-year peak earlier in March, with oil and gas companies pushing the total there.

"Since the list's inception in 2009, companies from the energy sector have represented on average 8% of the total. At the start of March, 2015, they made up 14% of the total; the highest percentage ever," Chursin added.

It is telling that of the 28 companies that joined the list in the past three months, 12 were from the oil and gas sector, she concluded.