Oil prices took another hit at the beginning of the week after the Caixin China Manufacturing Purchasing Managers' index (PMI) came in at 48.3 for October. That represents an improvement from the previous month, but any reading below 50 signals a contraction in economic activity - and the Caixin has been on the wrong side of the measure since February.
The PMI data came on top of news that Russia's oil production soared to a new post-Soviet high in October, while Iran has plans to increase its crude exports by around 500,000 barrels a day by late November. Tehran's determination to restore its pre-sanctions level is easily understood, but how has Russia been able to crank up production in the face of the oil price slump? Unlike their UK counterparts, Russian oil companies benefit from a flexible tax framework that transfers price risk from the private sector to the state through extraction and export taxes which adjust to reflect oil price movements.
None of this, of course, does anything to support prices. Although Brent crude is now trading 12 per cent adrift of its average rate for 2015, the latest data from the US Commodity Futures Trading Commission (CFTC) reveals that hedge funds are still increasing their short positions on forward crude contracts. The US Energy Information Administration (EIA) reiterated its forecast for the average Brent crude price for 2016 at $59 a barrel, but the bulk of risks are weighted to the downside. This is borne out by analysis carried out by Wood Mackenzie on the third quarter (Q3) results from the integrated oil and gas majors. Wood Mackenzie's upstream research team confirmed that earnings continue to narrow on underlying price weakness, accentuated by over $9bn (£5.8bn) in impairments. It's clear that expansion has firmly given way to capital discipline. The researchers highlighted a new phase of cost cutting for the majors, as they prioritise the funding of dividends through organically generated cash flows.
