Since April 4th, the inexorable rise of the Brent Crude oil price from just below $38 to just over $47, a rise of some 25%, has confounded the negative headlines that have proclaimed the oil industry’s demise at every opportunity.
The American Petroleum Institute’s latest report surprised the market with a draw of 1.1 million barrels on US crude inventories prompting an out of hours rally to a new high for the year, only to be contradicted by the official EIA report released mere hours later with a rise in the same measure of 2 million barrels. Normally, or at least in the new post-crash norm scenario of 2015 and the first quarter of 2016, the immediate drop reversing the day’s gains would have endured and even prompted a further drop on subsequent days. However, as another clear indication that the market is itching for a sustained and substantial recovery, bullish trading has driven the oil price back up to a new, higher high.
OPEC has lost its power
This scenario has been a recurring theme over the last three weeks as signs are that global crude markets have lost faith with OPEC having any remaining influence on prices.
Throughout 2015, as storage tanks threatened to overflow, the world hung on any every word, hint or twitch coming from the Saudi oil minister, Ali Al-Naimi and his peers. Their steadfast refusal to heed the pleas of nations, struggling to balance their books through a reliance on a exporting a commodity that was plummeting down eventually to lose 75% of its value by January 2016, and impose an OPEC production freeze suggested a clear strategy to bring US shale producers to their knees.
This aggressive plan appears to have overshot its intention with even traditionally low cost OPEC producers struggling to make ends meet. Meanwhile, the market has moved on and focus appears to have shifted to the fundamentals of supply and demand over the longer term. A rapidly dismantled shale infrastructure and strangled investment in future production throughout the world has been working away at eroding the supply side of the equation. On the other side, signs are that demand will continue to rise with a steadying and then recovering global economy towards 2020.
The biggest sign that the balance of power has shifted came after the failed producers’ meeting in Doha on 18th April. Here, leaders failed to agree a new production freeze even with the attendance of key non-OPEC producers such as Russia. Non-attendance by post-sanction Iran, reluctant to agree to anything that would constrain their own production recovery, scuppered any agreement and the optimistic bubble that had risen over the prior weeks delivering gains was burst, but only momentarily.
Actively looking for positive news
Increasingly, commodity investors seem to be casting around for positive signs to support their bullish outlook. The recent Kuwait oil workers’ strike pushed prices up as production was compromised. The inevitable drop once their return to work was negotiated was short-lived as optimism moved on to seek out the next indicator of good news.
Three months ago, bad news and good news competed and the negative headlines invariably won out. Through April, however, media outlets have struggled to keep pace with flipping news stories, at one hour reporting on a collapse due to one set of factors and then having to explain the converse as the numbers turn green once again.
Rebalancing the fundamentals
A rebalancing of market supply and demand fundamentals is driving bullish investors to bet heavily on oil futures rising in the second half of 2016.
As far as supply is concerned, the damage has been done. Large scale deferral of investment over the last eighteen months has opened up a future supply gap that even the US Shale industry, the new kings of the swing producers, will struggle to fill. Supply is further exacerbated by production outages such as in Venezuela.
The traditional powers of OPEC are diminished. Production data since mid-2014 shows that the expected steady ramping up of supply did not transpire and actually, a de facto production freeze is already in place as their ability to increase appears constrained.
There are caveats to consider. This is all playing out to a background of a weakened dollar which, as the commodity’s pricing unit, means an artificial boost of some 5%. Also, variations in market data are at the point of fine balance where their margin of error can easily turn a positive number into a negative one or vice versa.
It remains to be seen if such a delicate balance will be broken in the coming months if market fundamentals collapse, but the oil price, and the associated industry, companies, national economies and people that rely on its strength may once again be returning to sustaining levels. Source.