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07-08-2017

Oil Ends the Week Firm, but Downward Correction Is Coming: Barclays

Fridays gains were also driven by a good U.S. jobs report rather than improved fundamentals.

After a week of troubling price declines due to worry over building stockpiles caused by U.S. and Organization of the Petroleum Exporting Countries (OPEC) production, crude on Friday rose 1.1 percent - but due to a strong U.S. jobs report rather than any improvement in fundamentals.

West Texas Intermediate climbed 55 cents to settle at $49.58 per barrel, and Brent rose 20 cents to $52.21 per barrel; however, for the week WTI and Brent front-months were down due to rising output, with reports of strong demand tempering the losses.

OPEC's July exports of 26.11 million barrels per day (bpd) was a rise of 370,000 bpd, with most coming from Nigeria; this is a record high, and compounded by crude production in the U.S. hitting 9.43 million bpd, the highest since August 2015.

These factors caused Barclays on Friday to state, "we expect a downward (price) correction during this quarter," but forecasts Brent at an average of $54 per barrel during the fourth quarter.

The bank elaborated, "Prices have moved higher, due to a perfect combination of a favorable macro environment, a seasonal uptick in consumption, continued inventory drawdowns, and geopolitical unrest; certain factors that supported prices in July are unlikely to last.

"Fundamentals remain shaky this quarter, therefore any rally that occurs before more substantive inventory draws would be short-lived."

As for the jobs report, which revealed that the U.S. economy added 209,000 payrolls in July, it will presumably serve to benefit the market over the longer term: Michael Lynch, president of Strategic Energy & Economic Research, said it "made people think that the economy is still going strong and demand will be rebalancing the market faster than expected."

Once more, analysts stated what it will take to move crude prices  significantly upward: "To really push above $50, we need to see signs that this isn't seasonal strength in the market," said Gene McGillian, market research manager at Tradition Energy, referring to the summer driving season causing rising demand and a depletion of stockpiles.

Olivier Jakob, managing director for Petromatrix, put it another way: "It has been a good rally since June, but now crude oil has to prove that it can break its downtrend channel."

Reuters suggested that many challenges still face the bullish, and that "a price boom seems unlikely as the options market shows that at least until OPEC's supply deal expires, producers will pounce on any rallies."

Harry Tchilinguirian, head of commodity strategy at BNP Paribas, said, "I think funds are probably going to wait and see where we stand at the end of the summer before going long again.

"Interestingly enough, OPEC too will be waiting for the end of the summer to evaluate the impact of its supply cuts and judge what to do for the balance of the period of output restraint that runs to March next year."

Overall, analysts and producers seemed to be girding more for permanently low prices rather than any traditional recovery: Charles Diebel, head of rates at Aviva Investors, earlier this week hammered home that point by stating that $50 oil "is the upper end of the range as far as we're concerned" despite global demand growth.


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