For the past few weeks, maintenance, sabotage, wildfire, strikes and rebel attacks have added to supply-side disruptions, as shown in the chart below. So now, everyone’s celebrating the disasters, and even ultra-bearish Goldman Sachs is suddenly bullish on oil—but how far is this rally really going to go?
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Supply from Nigeria is at its lowest in decades; Canadian output has suffered due to massive wildfires, U.S. oil production is at 8.8 million barrels per day owing to the bankruptcies of shale oil drillers, and Venezuela is in a crisis that could reduce its output by more than 188,000 b/d. Oh, and the majority of Libya’s production from its eastern fields has been sidelined due to rival government squabbling that’s left its eastern port under blockade. Related: Oil Markets Balancing Much Faster Than Thought
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Considering the shortages, Goldman has revised its forecast of crude oil prices for the second quarter of 2016 from $35/b to $45/b. For the second half of the year, the bank expects prices to touch $50/b.
However, for the first quarter of 2017, the bank forecast $45/b, but by the end of next year, the bank believes crude oil can reach $60/b.
"The oil market has gone from nearing storage saturation to being in deficit much earlier than we expected," Goldman said. "The market likely shifted into deficit in May ... driven by both sustained strong demand as well as sharply declining production," the investment bank said. Related: Why Jim Chanos is Shorting the Oil Majors
According to the International Energy Agency (IEA), non-OPEC supply dropped by 125,000 barrels a day (b/d) to 56.6 million b/d, whereas OPEC supply rose by 330,000 b/d to 32.76 million b/d.
The rise in OPEC production is due to Iran increasing its output to pre-sanction levels. Iran produced 3.56 million b/d crude oil in April, out of which it exported 2 million b/d of oil.
The OPEC nations consider the current outages in supply as an opportunity to support prices, hence, Kuwait’s Deputy Foreign Minister Khaled Jarallah has called upon Iran to consider freezing production. "Iran should learn from the market. The market does not give an opportunity to increase production," Mr. Jarallah said, according to the state news agency KUNA.
However, the Iranian Minister of Petroleum Bijan Zangeneh rejected the freeze demands and reiterated the nation’s resolve to increase production to 4 million b/d.
On the demand side, the EIA has maintained the growth of 1.2 million b/d for 2016 and has cautioned that any revision is likely to be on the upside.
“Any changes to our current 2016 global demand outlook are now more likely to be upward than downward, as gasoline demand grows strongly in nearly every key market, more than offsetting weakness in middle distillates,” the IEA said, reports the Wall Street Journal.
Amid all the bullish news and rising prices, it’s important to note that the oil producers and merchants have increased their short positions to the highest levels since September 2011, according to Commodity Futures Trading Commission data for the week ending 10 May 2016.
Hence, a further increase in crude oil price is likely to face stiff resistance near the $50/b mark. Related: Oil Price Spike Is Not As Far Away As Many Think
“Price has been making an unbroken series of higher highs and higher lows amidst a weaker fundamental environment of higher supply. Strong resistance is expected around $48-$49 [per barrel] levels for WTI and $50-$51 [per barrel] for Brent,” said Gnanasekar Thiagarajan, a director with Commtrendz Research, told Gulf News.
Ole Hansen, head of commodities strategy at Saxo Bank also echoed a similar opinion. “While we may see a pop towards $50 per barrel during the current quarter, the risk increasingly remains skewed to the downside,” Mr. Hansen said.
Once prices reach and stay close to the $50/b mark, all eyes will shift to the two dark horses, Iran, and the U.S. shale oil drillers. Both are capable of offsetting any temporary supply outage.
Oil prices have already played out the upside target projected by Goldman Sachs. Hence, traders should exercise caution while taking any fresh long positions considering strong overhead technical resistance.
By Rakesh Upadhyay for Oilprice.com
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Production will skyrocket if prices go much higher. Demand on the other hand is limited by larger geopolitical forces.