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Oil Prices Poised To Rise In Early 2018

A consistent fall in comparative…

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Goldman Sachs: Inventory Drawdowns Will Not Continue

Goldman Sachs has reported that…

Nick Cunningham

Nick Cunningham

Nick Cunningham is a freelance writer on oil and gas, renewable energy, climate change, energy policy and geopolitics. He is based in Pittsburgh, PA.

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This Oil Price Rally Has Reached Its Limit

Barrels

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.

Related: Aggressive U.S. Oil Sanctions Could Bankrupt Venezuela

“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. Related: Is Big Oil Betting On The Wrong Horse?

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

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  • snoopyloopy on July 31 2017 said:
    Don't forget the looming cliff in demand. Tesla just delivered its first few Model 3s on time, LA Metro just ordered ~100 electric buses, and Proterra just opened their electric bus factory in SoCal with a backlog of orders to fill. If the market is fortunate, the draining of the glut will coincide with the drop in demand, but that leaves no room for prices to go extremely high as there is ample supply available to quickly fill any new demand.
  • JASON JONES on August 01 2017 said:
    Last paragraph sums the situation pretty well. Yes oil is overbought and due for some sought of correction. But its all pretty meaningless if US impose sanctions......
  • Alexis Ella on August 01 2017 said:
    Unrefined petroleum day by day graph, August 01, 2017

    Unrefined petroleum Price Forecast August 1, 2017, Technical Analysis

    WTI Crude Oil

    The WTI Crude Oil advertise at first touched the $50 level amid the session on Monday, yet moved over from that point. This is a region that I believe is vinyl on the more extended term outlines, so if we somehow happened to break above there, it would be a major ordeal for me by and by. I believe that this pullback from the $50 level demonstrates that the market is not exactly prepared to break out, and along these lines comprehensive here and now revitalizes could be offering open doors. Nonetheless, I perceive that in the event that we figured out how to close over the $50 level on the day by day time period, that would be an exceptionally bullish sign and more than likely send this market looking towards the $52.50 level above. I think the one thing you can rely on will be instability, so along these lines I would keep my position estimate to some degree little.

    Brent

    Brent markets gapped bring down at the open on Monday, never fully demonstrating the strength that the WTI review of raw petroleum did. Along these lines, the market at that point attempting to fill the hole, and afterward moved over once more. We are at present exchanging just underneath the $52 level, and I think there is most likely some help beneath, yet sufficiently given time I speculate that in the event that we can't make a crisp, new high on the day by day diagram, the market will start to move over as oil has had somewhat of a free ride for about seven days now. Along these lines, I trust that there is a great deal of the distrust in this market, yet all things considered. There is as yet a noteworthy issue with oversupply, and that has not changed despite the fact that the supply circumstance is showing signs of improvement. As we discuss more removes happening to OPEC, there are a lot of completed oilfields in the United States simply holding up to return on the web. I trust that keeps on weighing upon any rally.

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  • Old Market Watcher on August 01 2017 said:
    I admire Nick's contributions, but this one argues against its own title, for the most part. Rising demand conditions weren't adequately dealt with here, either.
  • Oilracle on August 01 2017 said:
    ---Oil traders are much more optimistic than they were just a month ago----

    Nope!
    It is all about the cunning situation in Venezuela
  • Dan on August 01 2017 said:
    We are in peak vacation time with roads packed with those RVs producing our GDP growth. Looks like Goldman wants to talk oil down for swing trade. Seriously Goldman, my neighbors trucks get about 10mpg pulling those RVs. Soon the Hamptons will be buying luxury RVs. Always late to the party.

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