After a six-week rally that saw crude push to the US$40 market, prices took a sharp turn Tuesday on rising U.S. inventories that implies markets have not yet made a full recovery.
“It’s not really a straight fall into line, there will be plenty of resets before we move structurally higher at the tail end of the season,” said Jon Morrison, analyst at CIBC World Capital Markets Inc.
Prices for Brent crude have risen an astonishing 50 per cent since their Jan. 20 low coupled with reached a three-month high to US$41.43 Tuesday morning, before receding below US$40. U.S. West Texas Intermediate futures also hit US$38.28 – its highest point this year – before slipping to US$36.50.
What’s incredible is that US$50 has become the new US$100.
CIBC expects WTI prices to average US$45 this season and US$65 the coming year as the spate of declines in Russian and U.S. production and robust China, India and American consumption bode well for that commodity.
Not everyone is convinced. Goldman Sachs, an important oil soothsayer, poured cold water over the rally in a report Tuesday, citing continued oversupply.
“Only a real physical deficit can produce a sustainable rally that is still months away should the behavioural shifts created by the low prices in January and February stay in place,” the New York bank said.
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But a change of tone among the Gulf states that dominate OPEC suggests US$50 has become the desired level for producers that had committed billion of dollars within their domestic economies throughout the era of US$100 oil, said RBC Capital Market’s Helima Croft.
“What’s incredible is that US$50 has become the brand new US$100,” Croft, RBC’s New York-based global head of commodity strategy, said within an interview. “It would still require borrowing (by Gulf states), plus some forms of rationalizing expenditure, but US$50 is exactly what they think may be the minimum they have to get through this.”
Oil firmed in recent weeks after OPEC proposed to freeze output at January levels gained momentum, Russian production declined and much more realistic assumptions on rising Iranian output.
The Uae – an important Saudi ally in OPEC – fuelled the rally on Monday, noting that “it does not make sense at all for anyone to improve production.”
However, a Kuwaiti senior official pointed out that his country’s participation depends on a reluctant Iran sticking with the freeze deal partly triggered the sell-off on Tuesday.
“If the market does not go ahead and take freeze seriously or there are spoilers, there would need to be more meaningful market measures,” Croft said. “The freeze is just important whether it’s a prelude to more steps.”
While OPEC flip-flops and conjures up imaginary declines in production, supply using their company producers is set to contract.
The U.S. Department’s latest forecast shows output from the “Big Four” shale plays – Eagleford, Bakken, Niobara and the Permian – will visit around 93,000 barrels each day in March and 105,000 bpd in April.
“The non-OPEC oil sector is now responding faster because of further deep cuts in upstream investment, that are feeding through as faster declines, led by U.S. tight oil,” Wood Mackenzie said inside a report Tuesday. “This re-adjustment from the fundamentals should result in a stronger price environment.”
The energy consultancy forecasts U.S. production to say no by around a million bpd this year to 6.5 million bpd, having a sharp upturn this is not on the horizon if prices recover.
“It’s harder to increase than it’s to ramp down, because of the layoffs in the last Twelve months,” said Alex Beeker, Houston-based analyst at Wood Mac.
“Lots of people are leaving the industry and as prices jump it’s going to take time for you to get the crews into the field. It’s not going to happen overnight.”
North from the U.S. border, active oil rig count stands at 103, half of its level last year, with Canadian conventional production set to drop 125,000 bpd this season, according to CIBC.
However, oilsands production will rise 250,000 bpd leaving Canada among a small group of producers raising output this year.
While supply tapers off, global demand remains robust, with China’s crude oil net imports reaching an archive eight million barrels each day in February.
There will likely be some more setbacks on the way, but there is a sense the summer driving season should lift sentiment as excess supplies melt.
Or as Barclays Capital puts it succinctly in its report Tuesday: It’s “the end of winter.”
yhussain@nationalpost.com
Twitter.com/YAD_FPEnergy
