Oil has steadied at a still-low $31 a barrel, with a major report on US inventories due later
The oil price endured wild swings on Tuesday, rising more than six per cent at one point to above $32 a barrel and touching session lows below $29.
Both the international and US benchmarks are extremely volatile at the moment as the determination of many analysts that painfully low and loss-making prices must soon turn higher runs up against stubborn negative sentiment on excess supplies. A sustained recovery remains unlikely until there is at least some movement from larger producers on output.
In a sign of how desperate the market is for just such a sign, the intra-day surge recorded yesterday was prompted by the vaguest of hints of greater cohesion from rival oil powers Saudi Arabia and Russia – Iraq’s oil minister said at an energy conference that he saw signs the two were more “flexible” on supply cuts, reports the Wall Street Journal.
But optimism off the back of the comments was short-lived. “We consider the likelihood of any agreement between these parties as extremely low,” ANZ Research said in a note to clients.
Saudi Arabia has repeatedly refused to curb its production without action from others and Russia has been shown to be pumping at record levels. Add a post-sanctions Iran and record output from Iraq itself into the mix and you have a recipe for the supply glut continuing through this year.
When attention returns to existing oversupply, prices fall. Overnight data from the American Petroleum Association revealed a big rise in US domestic crude oil reserves of 11.4 million barrels, notes Reuters, with official figures due to be published later today. Ahead of this, global price barometer Brent crude was steady at a still-low $31 a barrel.
Oil price: ‘there’s no reason to expect prices to go up’
After one of the strongest ever two-day rallies, the oil price is falling again and ultra-bearish sentiment driven by oversupply concerns has taken hold again.
International benchmark Brent crude fell to a near 13-year low last week, close to $27 a barrel, before a two-session advance over Thursday and Friday that has been described by Reuters as “nearly the strongest ever” saw it rise to almost $33 at one point. Then a slide resumed on Monday and overnight – and this morning in London, the price fell back below $30.
Oil recovered as a result of a broader risk rally, prompted in part by the hint of further stimulus from the European Central Bank. There was also a sense that two features of the market that were deemed responsible for the latest slump – the return of oil-power Iran to the international export market and the slowdown in growth in China – should have been already “priced in” by traders.
The reality, according to analysts, is that there is more oil coming to a chronically oversupplied market in which there are still one to two million more barrels a day being pumped than bought. Iraq has just announced another new record output figure; Iran is set to flood the market; US production is not slowing, and Saudi Arabia remains stubbornly resistant to cutting its activity.
One other issue that had prompted the recovery was the blizzard that hit the US east coast and which was supposed to boost domestic demand for heating oil in particular. However, this was never going to turn around the supply-demand dynamic. “Friday’s advance was an overreaction to the storm,” said Jim Ritterbusch, of Chicago-based oil consultancy Ritterbusch & Associates.
Most continue to believe $30 or below, at which much global production is loss-making and oil-producing nations’ budgets are in tatters, is “irrational”. But the market appears likely to remain focused on excess supply until output is curbed. “There’s more oil coming into the market and there’s no reason to expect oil prices to go up,” said James Williams, at WTRG Economics in London.
Hopes that the powerful Opec cartel may get its act together and change course to boost prices were hit again yesterday, as well. Secretary general Abdullah al-Badri argued that the market would recovery in a more sustained fashion and called on non-Opec members to slow production.
“It must be said that the prospects of any cooperation from outside Opec are weak at the best of times,” writes the BBC’s economics correspondent Andrew Walker.
Oil price recovery predicted – but still ‘one for the brave’
Friday’s oil price rally recommenced overnight in Asia, buoying hopes of a more sustained recovery.
International benchmark Brent crude had risen strongly to above $30 a barrel at the end of last week, amid a broader-based market rally prompted by hopes of European Central Bank stimulus. The worsening cold weather in the US, which saw violent blizzards across the east coast, added to the upward momentum, fuelling the sense that demand for heating oil would increase and pushing the price towards $33.
But the rally has already begun to fade and the underlying bearish sentiment is seeping back into the market. Oil has dipped back to a little above $31 this morning and trading is expected to be volatile as traders continue to focus on stubborn oversupply.
There is a view beginning to emerge from a number of analysts, however, that the concern over supply is being overplayed and that the fundamentals of the market should support a more sustained rise in prices. The return of Iran to the global export market and the slowdown in China should have been priced in, they argue, while production numbers can only fall sharply after billions of pounds of investment has been withdrawn.
A note published by Barclays analysts this morning noted the “world is drowning in oil” narrative in a recent International Energy Agency report, but added there is a “strong chance the IEA’s use of the term is in itself a signal that the worst for oil may now in fact be over”.
Writing on Oilprice.com David Yager, the national leader of oilfield services for Calgary-based consultancy MNP, cites the investment slump and gradual demand rises as he argues a rally that could outpace even bullish expectations may be due. “Oil is selling at a fraction of replacement cost while supplies dwindle and demand grows. Something’s gotta give,” he says.
However, supply remains an amount in the millions of barrels above demand and while producer nations refuse to get around a table, brittle sentiment will persist and rallies could continually be undermined. As FastFT notes, betting on the recovery is still “one for the brave”.
By The Week