Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
Global Warming ClImate Change Mega Death Trend - 8th Apr 24
Gold Is Rallying Again, But Silver Could Get REALLY Interesting - 8th Apr 24
Media Elite Belittle Inflation Struggles of Ordinary Americans - 8th Apr 24
Profit from the Roaring AI 2020's Tech Stocks Economic Boom - 8th Apr 24
Stock Market Election Year Five Nights at Freddy's - 7th Apr 24
It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- 7th Apr 24
AI Revolution and NVDA: Why Tough Going May Be Ahead - 7th Apr 24
Hidden cost of US homeownership just saw its biggest spike in 5 years - 7th Apr 24
What Happens To Gold Price If The Fed Doesn’t Cut Rates? - 7th Apr 24
The Fed is becoming increasingly divided on interest rates - 7th Apr 24
The Evils of Paper Money Have no End - 7th Apr 24
Stock Market Presidential Election Cycle Seasonal Trend Analysis - 3rd Apr 24
Stock Market Presidential Election Cycle Seasonal Trend - 2nd Apr 24
Dow Stock Market Annual Percent Change Analysis 2024 - 2nd Apr 24
Bitcoin S&P Pattern - 31st Mar 24
S&P Stock Market Correlating Seasonal Swings - 31st Mar 24
S&P SEASONAL ANALYSIS - 31st Mar 24
Here's a Dirty Little Secret: Federal Reserve Monetary Policy Is Still Loose - 31st Mar 24
Tandem Chairman Paul Pester on Fintech, AI, and the Future of Banking in the UK - 31st Mar 24
Stock Market Volatility (VIX) - 25th Mar 24
Stock Market Investor Sentiment - 25th Mar 24
The Federal Reserve Didn't Do Anything But It Had Plenty to Say - 25th Mar 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

This Oil Price Rally Has Reached Its Limit

Commodities / Crude Oil Aug 02, 2017 - 06:10 PM GMT

By: OilPrice_Com

Commodities

Last week, crude oil rallied the most so far this year, gaining more than 8 percent, or $4 per barrel. Oil traders are much more optimistic than they were just a month ago, and the market is on the upswing. However, the rally could run out of steam in the not-so-distant future, a familiar result for those paying attention to the oil market in the last few years.


There are several significant reasons why oil prices have regained most of the lost ground since the end of May. First, the OPEC cuts continue to have an effect. We can quibble over the degree to which OPEC members are complying with their promised cuts, but the cartel is taking more than 1 million barrels per day off the market, with a small group of non-OPEC countries contributing about half as much in reductions. As time goes on, that will help narrow the imbalances.

Second, U.S. shale is showing some signs of slowing down. There are a variety of reasons for this, including fear of another price downturn, more caution from oil companies themselves and even a bottleneck in drilling services. But the bottom line is that we can’t simply look at the shale rebound that we saw in the first half of the year, and extrapolate that into the future. There is a good chance that things start to slow down from here, and the market is starting to wake up to that fact.

Another reason oil prices bounced last week was because several OPEC members promised deeper cuts. Saudi Arabia said that it would cut exports by another 600,000 barrels per day. The de facto OPEC leader will also be specifically curtailing exports to the U.S., which will help drain inventories. In the ensuing days, the UAE and Kuwait have also pledged to cut their output further.

“Fundamentals continue to suggest a more-balanced crude-oil market,” said ANZ. The bank, along with other investment banks, are eyeing the shift in the futures market towards backwardation – a situation in which front-month crude futures trade at a premium to oil futures further out. Backwardation tends to signal near-term market tightness, a measure of bullishness that the oil market has not seen in quite a while. Backwardation suggests demand is strong and it also signals greater inventory drawdowns are coming down the pike.

The final and arguably most important reason for the latest price gains is the sizable drawdowns in U.S. crude oil inventories recently, a tangible signal that the market is finally rebalancing. Last week saw the biggest draw yet, with more than 7.2 million barrels taken out of storage.

But even as the oil market is suddenly looking a lot tighter than it did in June, there are also reasons to believe that the rally is running out of room.

Inventories are still high, and not just in the U.S. Also, while shale is slowing down, the U.S. is expected to add more output. Then there are other producers outside of the U.S. adding new supply. "We believe the latest price rise is on a fragile footing," analysts at Commerzbank wrote in a note, pointing to higher forthcoming production from Libya and Nigeria. "I don't see the physical market getting all that much better. There's still a lot of crude that's unsold, still a lot of Nigerian barrels floating out there," John Kilduff, founder of Again Capital, told CNBC.

There are also reasons less to do with the fundamentals and more related to the financial market that point to limited upside potential. The surge in oil prices over the past month has corresponded with a shift towards bullish positioning among hedge funds and other money managers. But the net-long positioning, as Reuters notes, has more to do with a liquidation of shorts rather than a major accumulation of long bets. That may seem like a trivial distinction, but if hedge funds are not scrambling to buy up long bets, that suggests that they are not all that confident about further price increases in the near-term.

Meanwhile, the oil market probably needs a breather after the gains since June. Matt Smith of ClipperData cites the fact that oil prices have surpassed their 200-day moving averages, which will make it more difficult for crude benchmarks to move even higher. "From a technical perspective, it seems as though this rally should be done," Smith told CNBC.

The one variable that could upend all market forecasts is Venezuela, which has been in economic turmoil for quite some time but is entering a new phase of crisis. The involvement of the U.S. government, which is retaliating against Venezuela for what it argues is a step towards dictatorship, threatens to accelerate the oil production declines in the South American nation.

If Venezuela sees its exports disrupted in a sudden way, the ceiling for oil prices in 2017 could be quite a bit higher than everyone expects at the moment. Otherwise, there is not a lot of room on the upside for oil prices in the short-term.

By Nick Cunningham of Oilprice.com

Article Source: http://oilprice.com/Energy/Oil-Prices/This-Oil-Price-Rally-Has-Reached-Its-Limit.html

By Nick Cunningham of Oilprice.com

© 2016 Copyright OilPrice.com - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

OilPrice.com Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in