China equity markets weaken

January 27, 2016

Crude prices have lost their fragile balance again dropping below the $30 level. A temporary growth in oil’s price has ended fast and global oversupply is dominating the market again.

Brent futures declined by 3% to $29.56, WTI dropped by 2.90% to $29.46 as of 02:55 ET, stopping a two-day rebound caused by an abrupt cooling in the U.S. and covering short positions. Both energy benchmarks have plunged by more than 5% during Monday’s session, extending declines today.

Iraqi Oil minister reported that Oil output climbed to a record high level in Southern and Central parts of the country. Current output of 3.8M barrels daily may be soon left behind increasing the production level to 4M barrels daily.

Another reason for investors’ fears is the persistent determination of Saudi Arabia to defend its market share by dumping Oil prices and involving other Oil producers in their game. Recent announcement of Saudi Aramco expressing the desire to stick to investment schedule signals that the Arabian producer feels quite comfortable at the current price levels and retains a solid margin of safety.

The pressure on Oil prices may be eased for a short time tomorrow if the EIA’s report shows reduced crude inventories. However, analysts expect an increase in stockpiles and a decrease in distillate levels.

The distress on Chinese stock market has renewed with more strength, with ShComp dropping by more than 6%, hitting the 13-month low. A drop in Oil prices got reflected on the Chinese shares as it indicates lower industrial demand for energy which in turn means further manufacturing slowdown. According to Bloomberg, the sell-off could reach $1 trillion in 2015, seven times higher than in 2014. PBOC attempts to step in with costly cash injections had little effect on equity markets showing China’s incapability of utilizing its monetary tools.

CSI 300 is down by 6%, Hang Seng declined by 2.48%, Topix lost 2.33%, following the Oil drop.

After jumping up slightly above the 82 level, USD/RUB has returned to the 80-80.50 range still tightly bound to Oil’s movements.

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