In Depth

Oil price posts two-year highs - but how long can it last?

Brent rose above $59 a barrel this week, its best third-quarter showing since 2004

Oil price rebounds on renewed production cap rumours

8 August

The oil price rebounded strongly in Asian trading overnight as rumours circulated of a renewed drive from Opec members to agree a cap on production.

Oil rallied to above $50 in the spring on the back of the cartel's talks to freeze output at January's record level, although these eventually fell through as Saudi Arabia pushed on with its turf war with Russia, Iran and the US.

Now rumours of a cap are growing again, originating from Opec countries Venezuela, Ecuador and Kuwait, all of whom have been hit hard by the two-year oil price slump, says Reuters.

Opec exports hit record levels in July, with output from Nigeria rebounding following disruption, along with that of Iraq and Libya. Talk of a production freeze, therefore, brought much-needed relief for traders.

International oil price benchmark Brent crude rose 1.3 per cent in London trading this morning at close to $45 a barrel – well up from its sub-$42 nadir last week.

Its US counterpart, West Texas Intermediate, increased 1.4 per cent at $42.40 a barrel, almost seven per cent up from its low point last week of less than $40 that put it in bear market territory.

However, there is a general feeling that any move for a cap will once again end in failure. Not only will agreement be needed with other Opec states locked in a bitter market share battle, a production freeze would also need to include the likes of Russia to have any real impact. Matt Smith, of ClipperData, told Reuters the drive appears "doomed to fail".

Set against optimism for a deal is a huge tide of negative sentiment on oil's supply-demand balance. Drilling in the US has begun to increase again, global production is soaring and demand is expected to wane as the global economy stutters.

After raw crude stockpiles in the US rose for the second consecutive week and with petrol reserves at record levels, Bloomberg reports that hedge funds and other large traders have boosted bets on the oil price falling to an all-time high.

Is the oil price set for a 'violent reversal' higher?

05 August

Oil rose six per cent in 24 hours and, according to one veteran trader, could be set for a "violent reversal" to much higher levels.

The steep overnight rise was driven by "short-covering" by hedge funds and other large investors, reports Reuters. This is where traders, who have recently built up a huge bet on prices falling further, are forced to switch out of bearish positions in response to an underlying upward move, accelerating the pace of increase.

The shift drove US price benchmark West Texas Intermediate to close to $42 overnight, up from less than $40 a day earlier, which represented bear market territory.

International oil price benchmark Brent crude rose back above $44 a barrel, up from its own bear market threshold around $42.

Analysts said the oil price has now risen overall, although not consistently, for two days.

However, there is "little fundamental data" to support a significant uptick, ANZ Bank said, as reports still point to resurgent raw crude stocks and a massive stockpile of refined products.

Consequently, prices waned in London this morning, with both benchmarks down around 0.5 per cent at 10.30am.

But veteran oil trader Andy Hall, who runs the Astenbeck Capital Management hedge fund, is telling his investors to expect a big move higher in the coming months, reports Bloomberg.

Hall, known as the "god of crude oil trading", says July's dip in prices, after a rally to above $50 in June, was "overblown" and that the market is "being driven by its own momentum".

He maintains that overall oil supply is much more balanced and that prices at the current level are "unsustainable".

Oil price rally on petrol stocks draw proves short-lived

04 August

Oil fell again on Thursday morning after surging overnight on the news that US petrol stocks had fallen substantially last week.

Brent crude had been as high as $43.64 a barrel in overnight trading, Reuters reports, but was 0.9 per cent down at $42.75 at around 11am in London. If it drops to $42, 20 per cent below its June peak, the international benchmark will be in bear market territory.

US counterpart West Texas Intermediate jumped above $41.40 at one point but has fallen to $40.65 today. It spent much of Wednesday's London trading session below $40, more than 20 per cent down on its own June high.

The trigger for the overnight rises was official inventory data in the US showing a sizeable 3.3 million-barrel draw on gasoline stocks, well in excess of predictions of a 200,000 fall.

Traders have been focusing on the glut in refined products, especially petrol, in recent weeks, which suggests a prolonged cut in raw crude reserves is reflecting refinery activity that is not being matched by underlying demand.

But given that the Energy Information Administration's report also revealed a shock increase in headline crude stockpiles of 1.4 million barrels, the oil price has been unable to continue the positive momentum.

"We are not surprised to see spot prices rebounding on the gasoline draw, but I think this will be short-lived," Tariq Zahir, a trader in crude oil spreads at Tyche Capital Advisors in New York, told Reuters last night.

"The bottom line is the Street in the second quarter got a little ahead of itself in calling for rebalancing of supply-demand after Canadian and Nigerian supply disruptions."

Recent reports suggesting increasing exports from Iraq, Libya and elsewhere are fuelling fears that production in the Opec cartel is ramping up, while US drilling activity also appears to be increasing.

Oil price hits new four-month low despite US supply draw

03 August

The international oil price hit a new four-month low overnight, while the main US price benchmark remained below the important $40-a-barrel threshold as supply sentiment remained bearish.

This was despite data from the American Petrol Institute yesterday showing a draw on US raw crude oil stockpiles last week that was in line with expectations and up from the week before.

Brent crude, which sets global prices for oil from the North Sea, fell below $41.70 last night, its lowest point since the very beginning of April. It was hovering around $42 in London this morning, the threshold of "bear market" territory at 20 per cent below the June peak.

US counterpart West Texas Intermediate was down at around $39.50 a barrel at one point, similarly its lowest level since the beginning of April. It was still languishing below the $40 threshold this morning at around $39.80, down more than 20 per cent from the June high.

API data showed stocks of raw crude at the main delivery hub in Cushing, Oklahoma, fell 1.3 million barrels last week, reports

Petrol reserves fell by 450,000 barrels, although distillates such as diesel saw a build of around 500,000 barrels. Inventories of refined products have been growing strongly, which has hit sentiment as it indicates underlying demand is still well below where it needs to be for a balanced market.

Moving the market in recent days have been reports that output from the Opec cartel is rising. Further credence was added to this view by estimates from Morgan Stanley yesterday that supply from Libya could be boosted by 300,000 barrels a day, reports Reuters.

It is also estimated that exports from Iraq were higher in July and that a turf war between Saudi Arabia and Iran has been gathering momentum.

There has additionally been data suggesting that drilling activity is picking up and that a steady slide in US production could have turned positive for the first time this year.

Oil price dips into 'bear market' amid latest production push

02 August

Global oil prices are in or around bear market territory after the main benchmark for US crude fell below the symbolic $40 per barrel threshold yesterday evening.

West Texas Intermediate, which sets the price for the lighter grade of oil extracted from US wells, dipped into the $30s overnight before recovering marginally to settle a shade above $40.

The benchmark remains down around 22 per cent from its peak at the beginning of June, meaning it is in a full-blown correction that is referred to as a "bear market".

Brent crude, the international price benchmark that applies to oil extracted from the North Sea, was trading just above $42 a barrel, a 20 per cent drop from its early-June peak. It recovered slightly in London trading this morning to $42.60 a barrel.

Despite a prolonged dip in raw crude reserves, prices have been under pressure as booming stockpiles of refined products point to an ongoing imbalance between supply and demand.

Raw crude stocks in the US recorded a surprise rise last week as returning output in Canada eroded a brief supply deficit. In addition, reports yesterday indicated exports from countries in the influential Opec cartel surged in July.

There was more bearish news today, with figures showing the overall count of active oil drilling wells around the world rose in June for the first time this year, driven by activity in the US. Net production in the US was also seen rising last week.

As a result, hedge funds have boosted "short" positions – bets on lower prices – by the biggest volume on record, says Reuters. Shorts on petrol prices are now at their highest ever level.

Analysts said there will be further pressure on oil in the near future and that the break below $40 would open the door to prices as low as $35 a barrel. But they are not expecting a return to the 13-year lows below $30 seen in February.

"We need to be prepared for lower prices and volatility," Ryan Lance, the chief executive of ConocoPhillips, said. "It’s going to take well into 2017 before we see any real increases in prices."

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