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Category: Business, Economics and Finance / Consumer Finance / Economic Trends / Oil and Gas

Oil traders caught short after 20pc rally in two weeks

Friday, 26 Aug 2016 14:24:35 | Emily Stewart

Oil has fallen from a year high of $US50 a barrel in June to $US40 a barrel in late July. (Reuters: China Newsphoto)

Traders have been caught out shorting oil after the commodity saw a 20 per cent rally in two weeks.

Short selling occurs when traders sell a security they do not own, in the belief the price will fall and the security can be bought back at a lower price to make a profit.

"There was a lot of negativity in the market, a lot of concern about oversupply and but this has really taken a back seat," said chief market analyst at Easy Markets, Tony Darvall.

"The sort of speed of this rally has led to short covering, and this is where those shorts have to get out of those positions."

Oil had fallen from a year high of $US50 a barrel in June to around $US40 a barrel in late July. An ongoing oversupply of oil is due to the world's biggest suppliers producing at record levels.

"Then suddenly on the sidelines of a conference the Saudi Energy Minister hints there might be a meeting of OPEC to freeze production levels," said Dr Graeme Bethune, chief executive of Energy Quest, an energy advisory firm based in Adelaide.

"That scares the wits out of the traders and they all rush to cover their short positions."

Saudi Arabia has been targeting the US shale oil industry and trying to push other high cost producers out of the market.

"The shale oil starts to come online between $US55-$US60 a barrel. This price gets hit - you'll see more production come online, more production, more supply, more supply, cap that price," said Mr Darvall.

At the same time, Iran has pumped up production after sanctions were lifted. Despite the bad blood between Saudi Arabia and Iran - they have hinted there might be an agreement to limit output.

Venezuela, another OPEC member, has publicly declared it is desperate for an agreement to help pull the country out of a deep recession.

"You know a price of $US70 a barrel would be a balanced price that would help stabilise world finances, the world economy, and guarantee investments for humanity to have its energy guaranteed," said President Nicolas Madura recently.

Production cut agreement unlikely, say analysts

"I don't think anything will happen in the OPEC meeting next month - there are too many diverse interests," said Dr Bethune.

"Iran is trying to increase production, the Saudis are producing at record levels already so it's pretty hard to see any real decision about a production freeze."

Which is probably the best news for Australian motorists.

The Australian Competition and Consumer Commission (ACCC) has said, though petrol prices at the pump are at their lowest levels in 14 years, they are still not low enough, and petrol retailers are not cutting prices in line with international oil prices.

Caltex Australia operates 1,800 petrol stations and said the profit margin it receives is a slim 3 cents per litre.

"What we're seeing is operational costs of running a service station are much higher now and so net profitability is about the same," said Caltex spokesperson Sam Collyer.

"For Caltex, as an Australian company, we have to be transparent about our fuel prices we have to be transparent about our profitability. So on a 40 litre fill, motorists are contributing about $1 to Caltex and $20 in government taxes."

Under pressure on commercial radio yesterday, Prime Minister Malcolm Turnbull weighed in to the debate, saying he would contact the head of the ACCC.

"I can see this has become a matter of real concern. I'll make it my business in the course of today to get in touch with Rod Sims myself," he said.

AustraliaPlus


 

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