Short-term factors cannot reverse the downward trend in international oil prices

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This post was last edited by cflt111 on 2016-2-3 20:20. Saudi Arabia announced on the evening of the 3rd, local time, that it would break diplomatic relations with Iran. Following news of strained relations between two major oil-producing countries in the Middle East, New York crude oil futures prices rose by about 3%, breaking through the $38 per barrel mark, while Brent crude oil futures prices also increased by over 2%. Geopolitical factors have driven a short-term, temporary rebound in oil prices, seemingly making the trend of international crude oil prices unpredictable, but this may not be the case. Given that the overall oversupply situation in the international crude oil market remains unchanged, short-term factors are unlikely to reverse the downward trend in international crude oil prices in 2016. 　　Recently, the price of crude oil in New York has approached $40 per barrel, nearing a new low since 2005. Brent crude oil prices also dropped to a near-decade low of $44 per barrel, with both having experienced cumulative declines of 22.6% and 21.8% respectively so far this year. 　　Statistically, there is a negative correlation between the US dollar and commodity prices. There is also a self-reinforcing relationship between commodity prices and the dollar, which amplifies the correlation between them. Driven by the continued recovery of the U.S. economy and the Federal Reserve’s tightening monetary policy, the U.S. dollar index has remained strong since June 2014; subsequently, as expectations of interest rate hikes increased again, the index resumed its upward trend after a short period of weakness. Oil prices fell further, especially after the Federal Reserve raised interest rates last year. 　　From the demand side, in early October 2015, the IMF had just reduced its forecasts for global economic growth for last year and this year by 0.2 percentage points each, to 3.1% and 3.6% respectively. The IMF states that over the past five years, global economic prospects have been revised downward repeatedly; the world economy is facing low levels of growth on a long-term basis, along with the risks of unacceptably high poverty and unemployment rates. 　　As China’s economic growth continues to slow down, the decline in its demand for commodities has altered the supply and demand dynamics in those markets. It is also an undeniable fact that the growth rates of other emerging economies have slowed significantly recently; these regions previously had high demand for commodities, which led to increased production in the relevant producing areas. Today, demand from emerging economies is declining, but high production levels have not yet decreased, resulting in a continuous drop in commodity prices. 　 The news coming from the supply side is also not optimistic. At the beginning of December last year, following the release of U.S. non-farm employment data, the highly anticipated meeting of OPEC members also came to an end. As institutions had anticipated, countries failed to reach an agreement on oil production limits, and there will be no production cuts in the coming months. Under this influence, international oil prices dropped again; oil prices in New York fell by 2.5% in a single day, dropping below the $40 mark at one point, while Brent oil prices declined to $43, approaching new lows in several years. Six months ago, several major powers reached an agreement with Iran on its nuclear program, which would lead to the lifting of sanctions against it; this was not good news for oil prices.