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4 Reasons Oil Will Rally Back To $50

Barrels

“I think there is a high probability that we could see [WTI] rallying back to $50,” Bob Parker, member of the investment committee at Quilvest Investment Management, said on Bloomberg TV.

The prediction comes after a string of data gives some hope to oil bulls, who had been chased out of the market in June.

Although each data point in isolation is not all that significant, taken together they point to some semblance of tightening in the market

For example, last week the in the IEA’s monthly Oil Market Report, the agency made headlines when it estimated that OPEC’s compliance rate dipped on the back of rising production from Libya and Nigeria. The unexpected increase in output will probably delay the oil market rebalancing, the IEA concluded. But buried beneath that bearish headline was the revision on oil demand – the IEA said global demand will expand this year by 1.5 million barrels per day (mb/d), or a jump of 0.1 mb/d from the agency’s estimate in the previous month.

So, demand is rising faster than expected, particularly in the second quarter compared to the first, which suggests the second half the year will probably lead to stronger inventory declines. The demand figures from the IEA were backed up by recently released data from China showing that refinery demand in June was the second strongest on record. And because China’s domestic production has contracted substantially over the last few years, it has had to step up imports.

A second reason that oil prices are starting to slowly inch up is that the U.S. rig count, while still increasing, is expanding at a slower rate. Last week the rig count only increased by 2, a rather small number in the context of the 14-month-long expansion since the spring of 2016. In the past three weeks, the oil rig count has only increased by 7; in the prior three-week period the rig count jumped by 25. Lower oil prices are starting to scare away shale drillers from jumping back into the field too aggressively. The smaller increases are giving oil traders hope that the drilling boom could be curbed, which in turn would contribute to a tighter market. Related: Significant Draw In Crude Inventories Jolts Oil Prices

A third reason oil prices are starting to edge up towards $50 is that the U.S. has posted two consecutive weeks of strong inventory declines. The EIA reported inventory drawdowns of 7.5 and 6.3 million barrels in the past two weeks, respectively, after several weeks of bobbing up and down or remaining flat. It is still early, but several more weeks of inventory declines would go a long way to shoring up a price floor in the mid- and perhaps even the upper-$40s.

A fourth reason why there is room on the upside for higher prices is the fact that the market won’t be blindsided by higher output from Libya and Nigeria again. “One of the reasons why the oil price declined over the last month was obviously Libya came back on-stream. That is now fully discounted into the market,” Bob Parker of Quilvest Investment Management said on Bloomberg TV. Parker also argued that the higher production levels from OPEC, which made headlines regarding the cartel’s weaker compliance rate, were rather trivial figures. He said that in the grand scheme of things, the slight uptick in OPEC output was not a big deal.

The more positive sentiment in the market is visible in the recent moves made by investors. Hedge funds and other money managers, having built up an extraordinary level of short positions in June, began liquidating them a few weeks ago. The most recent data shows that investors staked out more bullish positioning in each of the last two weeks, a period that corresponded with rising oil prices. Traders are “starting to see, not necessarily full conviction, but a little bit more optimism about some of the developments in the market, even though the overall tone is clearly still bearish -- it’s kind of going from bad to a little less bad,” Tamar Essner, an energy analyst at Nasdaq Inc., told Bloomberg.

Oil prices jumped by 5 percent last week, and the fears of sub-$40 oil are starting to fade away.

By Nick Cunningham, Oilprice.com

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