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 finds support at $48 as Norway strike looms

28 June

The oil price initially rebounded on Monday morning, as markets generally opened in a calmer mood, but then quickly saw sharp decline.

Reuters reports that traders turned back to the supply issues that have been threatening to rebalance the market – and especially looming strike action in Norway, which could impact on output from this Saturday.

Disruption in the likes of Canada and Nigeria had been easing, bringing more barrels back to market and prompting fears that a global supply glut would return. The Norway oil sector turmoil is therefore seen as a bullish signal.

Of course, this is not the dominant force in the market at the moment. Of greater importance are currency movements – and this is what undermined a modest rally yesterday.

In short, the pound was getting pummelled, which boosts the dollar and makes oil more expensive to foreign buyers. This is seen as bearish for demand by traders already spooked by the potential for a damaging post-Brexit recession.

Having recovered earlier on, the pound hit a new 31-year low against the dollar yesterday. It is rallying again today, by around 0.6 per cent to just shy of $1.33, but trading remains volatile.

The oil price will probably continue to gyrate all the time the Forex markets are so skittish – and with the pound likely to remain under pressure, there is reason to suspect it's headroom for short-term growth is limited.

At the same time, the downside looks similarly narrow because the supply picture is quite positive. In a report yesterday, Morgan Stanley even suggested this view could be exacerbated by Brexit if it causes companies to further reduce investment to bring new supply to market.

Oil price stabilises after bullish Goldman Sachs note on Brexit impact 

27 June

Oil prices have stabilised in London after a sharp drop on Friday and a further slide in Asian trading overnight on the back of the UK's shock vote to leave the European Union.

International price benchmark Brent crude dived five per cent on Friday and then edged lower again overnight to a little above $48 a barrel. Its US counterpart, West Texas Intermediate, was down 0.5 per cent to around $47.25 a barrel.

Oil is not directly affected by Brexit, but the hit to the UK and European economies is seen as negative demand, as is the inflationary impact on the dollar from the tumbling pound.

But oil actually gained marginal ground in morning trading in London today, Reuters notes, after long-time bear Goldman Sachs issued a note dismissing fears the EU referendum result would impact significantly on demand.

"If we assume a 2 percent drop in UK GDP in response to the exit vote, which is on the high end of our economists' estimates, then UK oil demand would likely be reduced by 1 percent or 16,000 barrels per day, which is a 0.016 percent hit to global demand," it said.

"This is extremely small on any measure."

Morgan Stanley generally agreed, although it added: "Europe is a big trading partner for the United States and China, which could lead to knock on global effects" that would be deleterious for demand.

That is not to say Morgan Stanley was upbeat, more that it sees the real problems being elsewhere.

"For near term oil, we remain most concerned about product oversupply, China demand, the macro outlook, and the likely return of production [in the US following a prolonged rise in prices]," its analysts said.

Oil could hit $45 before post-Brexit slide is done

24 June

Oil has, as expected, fallen sharply after the decision of UK voters to leave the European Union.

Expectations that the status quo-supporting Remain camp would ultimately prevail saw oil futures rise earlier this week, along with global stocks and the pound. “Financial markets… were clearly not fully factoring in the risk of a Leave vote,” says Reuters.

Now that the seemingly unthinkable has happened, a major risk-off move is taking place. Sterling fell to its lowest level for 30 years, the FTSE 100 initially shed £120bn and the oil price crashed by more than five per cent.

International benchmark Brent crude was down 5.4 per cent at a little above $48 a barrel at around 11.30am in London trading today. Its US counterpart, West Texas Intermediate, dropped a similar margin to hit $47.50 a barrel.

While oil is not directly affected by the vote, traders fear there could be economic damage beyond the UK and Europe which could hurt demand. That precipitous fall in the pound is also driving up the dollar, which makes the commodity more expensive for overseas buyers.

Nor do analysts believe the slide is over.

"Our view is that we have not yet seen the low oil price of the day, with Brent likely to trade down towards $45 or lower before we have seen the worst of it," Reuters [1] reports Bjarne Schieldrop, the chief commodity analyst at SEB, saying in note to clients.

Beyond the result, it will be interesting to see how oil will react next week and in the medium term, with intense volatility likely. Bearish underlying signals on global supply are still expected to hold the gains from any eventual recovery.

Will oil price surge if Remain wins the EU referendum?

23 June

Oil futures, like most risk assets, has been doing better in recent days as traders take heart from a late polls shift to Remain ahead of the EU referendum.

Having fallen for six consecutive sessions from a 2016 high of $53 two weeks ago, international benchmark Brent crude returned to $50 earlier this week. It has been held back from further gains by supply concerns – so would a Remain victory send it soaring?

No, says investment bank BNP Paribas. It outlines a lose-lose scenario for oil: either a Leave vote sends the price spiralling lower in response to a demand-dampening surge for the dollar against the pound, or a Remain victory focuses attention back on supply and demand fundamentals that do not support higher prices.

"Either way... it may be interesting to take up some insurance and buy downside protection," the bank said in a note reported by Reuters.

Brent crude fell slightly yesterday in New York after a report from the US Energy Information Administration showed a disappointingly small dip in domestic crude stockpiles of less than a million barrels last week while stocks of petrol and distillates had surged, despite soaring demand.

With output from the likes of Saudi Arabia stubbornly high, production disruptions in Canada and Nigeria being steadily resolved and expectations that current prices could bring more US shale-drillers back to the market, the supply picture makes many nervous in the medium term.

Brokers have consistently estimated the oil price will barely move from current levels by the end of 2017 – and could be lower in the second half of this year. Any boost from a Remain victory would be short-lived in this scenario.

But there are those predicting a more sustained recovery. Earlier this week, Raymond James forecast oil could return to $80 a barrel as cyclical production falls and reduced investment prompts a larger supply deficit in the coming months than most experts are expecting.

Oil goes above $51 as traders bet against Brexit

22 June

International oil price benchmark Brent crude bucked earlier modest losses on Tuesday afternoon and has risen above $51 this morning as traders continue to bet against Brexit. 

Analysts have warned of volatility for markets, including oil futures, ahead of tomorrow's EU referendum, which could have implications for demand if a vote to Leave hits growth in the UK, Europe and elsewhere, along with an expected surge for the dollar in response. 

Marginal losses in early Tuesday trading were little more than a pull back after two days of advances, with Brent nudging 0.1 per cent lower. Its recovery was helped in part by a report on US crude oil reserves that had positive implications for supply.

The American Petroleum Institute (API) revealed a draw of 5.2 million barrels on US reserves, Reuters reports, way ahead of analyst expectations and suggesting that demand is still outstripping supply after recent outages.

Official data from the Energy Information Administration, which can often be at variance with the API numbers, is published this afternoon. 

Should the UK vote to remain in the EU, the supply balance will come back into focus. But the picture is still "hazy", the Wall Street Journal says. Prices may struggle if output disruptions in Canada and Nigeria are quickly resolved and the likes of Saudi Arabia and Iran continue a turf war.

"It would appear that the strong spring price advance has run its course and that fresh highs are a slim possibility even when extending a view out across the rest of the summer," Jim Ritterbusch, the president of energy-advisory firm Ritterbusch & Associates, said in a note.

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