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14-06-2017

Oil Edges Up But It's Still a Buyer's Market - and $55 is a Long Way Off

Plus, at least one analyst is lukewarm over glowing reports about Saudi cutbacks.

Oil prices on Tuesday crept upward after a flat trading week due to reports that total U.S. crude and product stockpiles jumped by the most since 2008, but even though Saudi Arabia continues to hold the market together, analysts say it might be some time before we see $55 per barrel again.

West Texas Intermediate settled up 38 cents to $46.46 and Brent climbed 36 cents to $48.65 per barrel, this time on the expectation of traders that upcoming weekly data will reveal an over 2 million barrel drop in U.S. stockpiles.

John Kilduff, founding partner at Again Capital, said, "When you're this low, the bears kind of have to run the table; this should breath some life into the bulls if it is that bullish of a report."

But Olivier Jakob, strategist at Petromatrix, seemed less impressed by the circumstances, and he downplayed reports of Saudi Arabia continuing to cut beyond its target under the Organization of the Petroleum Exporting Countries (OPEC) crude reduction agreement: "They're making a lot of headlines about reducing supplies, but that's also right in their seasonal pattern of lowering exports in July, August because of domestic needs."

He said the cuts must continue beyond the summer months to have any true positive effect, and he pointed out that OPEC's gradual approach to rebalancing the market is giving U.S. producers time to drill new wells that are undermining the impact of the cartel's cuts.

Meanwhile, with global supply and demand calculations indicating the market should be reducing stockpiles but prices suggesting actual inventory reductions are minimal, Jakob said "it's a buyer's market" and that "this should be the tightest season of the year, but if you look at physical oil differentials and Brent spreads, it’s signaling a crude overhang in the Atlantic."

Bill O’Grady, the chief market strategist at Confluence Investment Management, noted that $46 and some change is a far cry from last month's $52 peak: “The market’s been leaning pretty hard bearish; if last week turns out to be kind of a weird outlier, you don’t really want to be short going into this number.

"You’ve got enough Saudi support to prevent the market from really falling apart, but you just don’t have enough to really get you above $55.”

But at a time when even minuscule victories are welcome, good news on Tuesday was delivered by Khalid Al-Falih, energy minister for the Saudis, who told CNBC that his kingdom's effort and that of fellow Arab nations to isolate Qatar - a point of major market angst last week - won't impact oil prices significantly: "Within the energy markets, there is no change."

Still, there are enough storm clouds on the horizon to give even the optimists pause, the biggest one in the form of Nigeria, Libya, Argentina, and even Canada reportedly poised to further exacerbate the global glut.


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