With oil storage nearing full capacity, is $20 oil a possibility?

December 22, 2015


The two big themes that have been influencing financial markets over the course of the year, the oil price and the US interest rate rise, continued to be headline news last week. After a long wait, the Federal Reserve finally decided to increase interest rates, raising them by 0.25%. While the vote was largely expected, international financial markets reacted positively to the news. This perhaps indicates that some investors were still anticipating that the Fed would shock markets once again and leave rates unchanged. The magnitude of the move is unlikely to fundamentally change the state of the US (or global) economy. However, investors and policy makers will be watching closely to see how markets absorb the increase after having such low interest rates for such a long period.

The oil price continued to slide and has now reached a level which is below that seen during the financial crisis. Commentators that were once dismissed for predicting that oil could reach $20 a barrel may soon be proved right, as there appears to be very little support with the current backdrop. As global oil storage begins to reach full capacity there is now a concern that the world may extract oil for which there is no demand and which cannot be stored, leaving the oil with no fundamental value.

Elsewhere, Japan’s central bank surprised markets by suggesting that there was no immediate need for an expansion of the current monetary stimulus. Many investors were hoping that given the Japanese economy’s lacklustre performance the central bank would be open to more easing. As a result of the comments, the Japanese equity market sold off towards the end of last week.


Index Open Close Change % Change
FTSE 100 5952 6052 100 1.68%
S&P 500 2012 2005 -7 -0.35%
Dax 10340 10608 268 2.59%
Cac 40 4549 4625 76 1.67%
Nikkei 225 19230 18986 -244 -1.27%
UK 10 Year Gilt Yield 1.831 1.839 0.008 0.44%


As we enter the Christmas period news flow over the next few days will be relatively weak. The most significant news will be inflation and unemployment figures from Japan on Christmas Eve.