Despite the greater than Half gain in crude oil since mid-February and costs looking relatively stable around US$40 per
barrel, few are convinced the strength is here to remain.
Commodity analysts at Macquarie Capital are calling for a correction in oil prices back to the mid-US$30 to low-US$30 range.
“Although we are constructive within the medium and long-term, the current oil price recovery has occurred against a backdrop of weak fundamentals,” Vikas Dwivedi said inside a research note. “Came from here, under appreciated bearish fundamentals, plus stagnating (bullish) externalities, should turn back rally.”
He noted that the oil price rally was likely initiated by inflows from both institutional and retail investors, as the moves higher accelerated because of several bouts of short covering since mid-February.
The analysts cited a summary of short-term factors working against oil.
One such driver is the fact that Iranian oil exports are ahead of schedule, with 500,000 barrels per day expected in the next two weeks.
Meanwhile, oil tanker loadings in Saudi Arabia are up 300,000 barrels each day when compared to fourth quarter of 2015. So despite its production freeze, Macquarie noted that destocking and much more natural gas use could boost the country’s exports.
The analysts also highlighted the current US$125 million outflow in the United States Oil Fund ETF, warning that this selloff could accelerate if the rally stalls.
Then there is the U.S. dollar, where weakness hasn’t only slowed, however the currency has actually rebounded following its sharp decline that began at the end of February.
But despite Macquarie’s short-term bearish call, the analysts remain rather bullish on oil for the following couple of years. They’re forecasting WTI crude prices revisit US$70 per barrel in 2018.
