Oil prices have been extremely volatile since the first trading day of 2016 and hit 12-year lows last week with Brent dropping below US$33/bbl for the first time since 2005.
The fall in the Chinese manufacturing index, the Saudi-Iran standoff and North Korean nuclear test have all had a significant impact on shaping oil price trends.
Brent crude rose to a three-week high of $38.91/bbl on 4 January as a consequence of the Saudi-Iran geopolitical risk but these gains were quickly diminished due to concerns over economic slowdown. Rising tensions in the Middle East typically trigger an increase in the price of oil, yet it seems that bearish sentiment elsewhere has prevailed over potential risk.
China’s manufacturing sector shrank for the fifth consecutive month and the Shanghai Composite stock index finished 10% down for the week; leading to uncertainty over the outlook for energy demand in China. It is a clear indication that oil demand from the world’s number two oil consumer is slowing and that the current oversupply of oil may be more persistent than expected.
Adding to uncertainty over the growth in China, news of the North Korean nuclear test came on the 6 January, which triggered Japanese and South Korean stocks in Asia to decrease overnight as investors looked to less risky assets. Whilst this has contributed to further geopolitical uncertainties, it is unlikely that it will have a sustained impact on oil prices.
Nevertheless, oil prices are likely to remain at low levels until the supply-demand balance tightens, with prospects of production declines or a pick up in the global state of the economy seeming unlikely in the short-term.