The first quarter of 2016 is likely to be the “worst in the cycle” for beleaguered oil prices, says Saxo Bank.
In a new report titled, Minding the gap – Saxo’s Essential Trades for Q1, Saxo said the lifting of sanctions in Iran will likely flood the already oversupplied market with further crude oil supply.
Saxo's head of commodity strategy, Ole Hansen, said the lifting of the 40 year-old export ban will prolong the period of low prices as a result of more than 100 million barrels currently in storage likely to be “pushed” out into the global market.
“At this stage the overhang of supply going into 2016 will keep prices under pressure for most of the year,” Mr Hansen said.
Mr Hansen pointed out that in order for prices to recover, oversupply needs to be removed either by a pick-up in demand or an adjustment from the supply side.
“Such an adjustment is particularly hard to achieve during an oversupply-driven sell-off as producers, wherever possible, ramp up production in order to defend revenues,” he said.
“We expect that the battle for market share eventually will lead to casualties among both metals and especially oil producers and this will help balance these markets during the second half.”
The first quarter of the new year will also challenge precious metals, with investors moving towards currency.
According to Mr Hansen, investors see “higher rates in the US and continued quantitative easing in Europe and China as a dollar-buying opportunity”.
Additionally, the rising US dollar, low inflation, fading safe-haven appetite and US rate rises are also “key drivers” behind the weakness in precious metals like gold.
Mr Hansen concluded that the “horrendous” 2015 commodities experienced is unlikely to change, with only a “glimmer of light at the end of the tunnel, at least for the early part of 2016”.
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