Brent futures gain as global capital markets try to find their feet

Front month Brent futures are now edging higher following a large bounce in the previous session, mimicking price movements in the other main asset classes following Wednesday spasm, which sent US, UK and German longer-term bond yields to record lows.

That synchronised selling in sovereign debt markets earlier in the week was described by some veteran market observers as a “flash crash,” as traders scurried to re-position themselves given the shifting market backdrop – poor growth in the Eurozone and a rapidly strengthening dollar - but in some instances found themselves unable to do so given poor liquidity conditions (despite high trading volumes).

Hence, there has been speculation that some forced selling may have been taking place, much as was seen during some of the worst episodes of the past financial crisis, with all markets now trying to reach some sort of equilibrium after hitting more than two -year lows.

Case in point, 10-year Greek government bond yields are on Friday morning plummeting by 85 basis points to 8.13%, unwinding roughly half of this week's rise in one fell swoop.

Will OPEC cut production or not? That is the question

Aggravating all of the above, several key members of the Organisation of Petroleum Exporting Countries (OPEC) – such as Saudi Arabia, Iraq, Kuwait - have of late shown a great reticence to decrease their own output in a bid to stabilise prices – arguably the oil cartel’s traditional role.

On Friday morning Kuwaiti officials reiterated that they see no reason to cut their output at the moment. That comes as traders speculate on whether OPEC will take any action when it next meets, in November.

Amongst other considerations, those countries are thought to be worried about their continued loss of market share to US shale producers. As well, the recent recovery in Libyan oil production has pressured oil prices considerably.

Libyan officials today said the country is currently producing 800,000 barrels a day.

Supply growing more quickly than demand, for now at least

On 7 October the Energy Information Administration (EIA) forecast that non-OPEC supply will grow by 1.9m b/d in 2014 and 1.2m b/d in 2015. The United States and Canada were expected to account for much of that growth, the US Department of Energy’s (DoE) statistical arm said.

As regards some of the main variables on the demand side, projected world liquid fuels consumption would grows by an annual average of 1m b/d in 2014 and 1.2m b/d in 2015, the DoE estimated.

To take note of, some econometric studies have shown that a 1% increase in global oil supply (or some 920,000 barrels a day) can lead to drops of between 20-30% in the price of a barrel of oil on international markets, all else equal.

Recent increased production from Libya and Saudi Arabia alone might thus be able to explain the recent sharp falls in the oil price.

On top of the above, and on the other side of the equation, this past week the International Energy Administration cut its target for world oil demand this year by 200,000 barrels per day.

As of 10:41 front month Brent crude futures are rising by 1.07% to $86.75 per barrel on the ICE.