How Low Can They Go?

The FTSE 100 opened today at 5804 and peek above 5850 before dipping below 5770 where it eventually recovered some of today’s losses and closed down at 5780 (-0.42%).

Oil prices continued to slip today, where at the time of writing this, Brent Oil stood at $28.72 a barrel (-2.51%).  Oil & Gas companies within the FTSE 350 saw their share price fall as uncertainty continues to cloud their future.  Ophir Energy, Tullow Oil and Royal Dutch Shell all saw their share price contract by -4.88%, -3.07% and -1.04% respectively.

Brent oil fell below $28 again today which has stirred concerns amongst investors, especially concerning companies that are debt heavy as it is doubtful they will be able to reduce much of this debt without the prospect of increasing oil prices.  This seems unlikely as cheap Oil seems to be flooding the market, but no one seems to want to buy it.

Today’s declines in Oil prices were predominantly due to Western sanctions on Iran being lifted which means that half a million barrels of Oil could be produced per day by them.  Iran has already made it clear as to where they stand in terms of levels of Oil they will produce.  They do not plan to hold back as their economy needs to bring in the revenues thus they seem willing to produce regardless of where prices stand.  Investors fear that lifting these sanctions on Iran may only worsen the existing oversupply already seen within the market.  Sanctions were lifted after it was announced by IAEA, the international nuclear watchdog, that Iran had complied with a deal that was designed to prevent the country from developing nuclear weapons.

On top of the ability to pump out half a million barrels a day onto the market, Iran also have a large supply.  It is considered to hold the 4th largest Oil reserves in the world which has the markets worried as they have the ability to increase supply within the market quite quickly.  This added onto the declining levels of demand for the commodity, due to the slowdown in economic growth within Europe and China, as well as the US continuing to flood the market with shale Oil, has led investors to question how low prices can go.

Standard Chartered have forecasted $10 a barrel for Oil, whereas Morgan Stanley had already previously announced that Oil prices in the $20s is possible.  The Royal Bank of Scotland is somewhat in between these forecasts as they believe Oil could fall to $16 a barrel.  Investors are hoping oil prices start to increase soon, however, a sudden significant increase in Oil prices may have just as many consequences as the swift decline seen since the summer of 2014.  As seen in 1973-1974, Oil prices went from $3 a barrel to $12 a barrel which caused new economic powers, Oil wars and it also had a negative impact on economies like Europe, the US and Japan.

At the close, European indices were down with the FTSE 100 -0.42%, the CAC 40 -0.49%, and the DAX -0.25%.  Asian indices were also down for the day with the Hang Seng -1.45% and the Nikkei 225 -1.12%.  US markets were closed for today but will resume tomorrow.