Oil Prices At A Ceiling, Or Just Getting Started?

Tyler Durden's picture

Authored by Nick Cunningham via OilPrice.com,

Oil moved back into bull market territory this week, with Brent prices jumping to a more than two-year high at $58 per barrel. A confluence of events has given a jolt of optimism to oil prices, with market sentiment at its most positive arguably in years.

The proximate spark from earlier this week was the Kurdish referendum, which raised the specter of a sizable supply outage when Turkey threatened to cut off Kurdish oil exports through its territory, and Baghdad joined in by calling for an international boycott of Kurdish oil sales.

So far, there are no signs of an actual supply disruption, but oil traded up at the start of the week on the heightened geopolitical risk.

But Brent prices have only moved up into the upper-$50s because the underlying fundamentals have improved markedly in the last few months. Oil demand is robust and continues to grow even as global supplies have stagnated. The OPEC deal seems to finally be bearing fruit in the form of a sharp decline in global crude oil inventories.

The oil market could finally be breaking out of a depressed pricing environment after three years of sluggishness, according to Trafigura Group, an oil trading company. “We are nearing the end of ‘lower for longer’ oil,” Ben Luckock, co-head of Group Market Risk at Trafigura said at the S&P Global Platts APPEC conference in Singapore on Tuesday. Luckock cites the fact that the oil market could lose some 9 million barrels per day (mb/d) by 2019 just from well depletion. That could leave the world short on supply, pushing up prices significantly.

Citigroup said that the supply crunch could come as soon as next year, arguing that so many OPEC members are already producing at their maximum, despite nominally restraining output. Libya, Nigeria, Venezuela, Iran and Iraq might not be able to add new supply next year, Citi says. And in fact, the risk of a slide in production is probably a more likely outcome for some members. “Fear in the market has been that OPEC production will rise dramatically,” Citi’s Ed Morse said in Singapore. But, “there could be a supply gap emerging, which could point to a tighter market.” Much of OPEC is failing to invest in its upstream capacity, Citi argues, leaving little room for higher output. Related: Is This The End Of U.S. Dominance In Global Energy?

Goldman Sachs added its voice to the growing chorus of bullishness this week. The investment bank argues that the backwardation exhibited in the Brent futures market—a situation in which near term oil contracts trade at a premium to futures dated further out—is a clear sign that the market is on its way to rebalancing. Backwardation will help drain inventories at a faster rate in the months ahead. “[T]he combination of very strong demand, potential greater cohesion among OPEC and growing pains for shale suggests that backwardation is likely to remain in place in coming months,” Goldman wrote in a note.

However, not everyone agrees that there is further room to run for oil prices, and just because oil has rallied in the past few weeks, does not mean that greater price increases are a foregone conclusion.

There are several roadblocks ahead.

With Brent prices back towards $60 per barrel, there could be a temptation by some OPEC members to add some barrels back onto the market, undermining the group’s collective compliance rate. The original six-month OPEC deal was much easier. The market looked much less stable, and cuts came at a seasonally advantageous time—Russian output tends to decline in winter months, for example, while it ticks up in summer months. Russia’s numbers look better recently, but only because of field maintenance.

With oil back (almost) at $60, the rationale for the OPEC cuts could lose some of its urgency. $60 has sort of been the informal target for the cartel, and participating countries are much more likely to cheat with prices firming up at that level, according to Olivier Jakob of Petromatrix. Related: Oil Analysts Baffled As Venezuela Ditches Petrodollar

At the same time, many argue the OPEC cuts still need to be extended because a $60 price signal will spur more shale drilling, putting downward pressure on the market all over again. “Brent could go above $60 a barrel in the fourth quarter,” Giovanni Staunovo, a commodity analyst at UBS Group AG, told Bloomberg. “It would send the wrong message to U.S. shale production to hold above there—drill and produce more.”

Moreover, Chinese oil demand soared earlier this year but has since cooled. U.S. shale continues to add output, and they also have a huge backlog of drilled but uncompleted wells. The fracklog, coupled with a step up in drilling, could lead to production growth of about 400,000 bpd over the next four months, Alexandre Andlauer, an analyst at AlphaValue SAS, told Bloomberg in an interview.

Finally, the financial positions of hedge funds and other money managers are starting to look a bit overdone. The recent surge in bullish bets from investors opens up more downside risk. As has been the case numerous times in the past two years, when bets on futures go too far to one side, the pendulum swings back. “The market is apprehensive about pushing [Brent] to $60 a barrel,” Geordie Wilkes, a research analyst at brokerage Sucden Financial Ltd., told The Wall Street Journal.

As always, there’s much disagreement among oil analysts on what happens next.

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adr's picture

Don't confuse stockpiling inventories and fake end consumption data with real increased demand. 

True consumption has fallen off a cliff. 

1835jackson's picture

It's going up. Why? Because I said so, that's why!

Broken_Trades's picture

Oil finishes the year above 70$. 2018 oil trades above 80$ for most of the year. Because I said so.

BT

 

The_Juggernaut's picture

Hundreds of millions of Chinamen and hundreds of millions of Indians will be buying cars in the coming years.  Where do you think oil's headed?

Doña K's picture

Not enough roads in china and india for all these cars. Most cars in China and India are front garage show pieces.

sinbad2's picture

China is building roads that go all the way to Paris, now that would be one big road trip.

India is shooting itself in the foot, like India always does.

Bunghole's picture

Oil goes up, so do gold and silver.

Look at the last spike

Just sayin

Keyser's picture

Do not underestimate Wall Street's and the Fed's desire to ramp inflation... No better way than to engineer a crisis in the oil markets to drive oil higher... Watch of an event to disrupt global supply, driving prices higher by year end... 

just the tip's picture

because i said so.  -  Gartman

 

big tex's picture

Where do you get your data?  Globally we are due to add 1.4 million barrels a day in 2017.  

NoDebt's picture

OUSPEC might have something to say about further price rises.

(OUSPEC = Organization of the United States Petroleum Exporting Country)

 

BritBob's picture

Falklands Oil

By a ruling of the UN, Argentina will extend its maritime platform (Politica Argentina) ; New map of the maritime platform reaffirms the sovereignty of Malvinas with UN endorsement (ElCronista); Argentina enlarges its territory 35%, with a UN endorsement ...(La Capital).To add to this euphoric atmosphere the Argentine Foreign Minister stated, ''This is a historic opportunity for Argentina. We have taken a great step in the demarcation of the outer limit of our continental shelf; the most extensive boundary of Argentina and our border with humanity,'' Foreign Minister Susana Malcorra told La Nacion, which tomorrow will publicly announce the details of this resolution. (Susana Malcorra, quoted by Dinatale M, La Nacion, Argentina, 27 March 2016).

 

But what is the truth...

Argentina's Continental Shelf Claims and The UN CLCA Commission (1 page):-

https://www.academia.edu/33898951/Argentinas_Continental_Shelf_Claims_-The_UN_CLCS_Commission

 

Bunghole's picture

The Queen Mum can lick my hairy ass.

Spare us your crown rhetoric

Sizzurp's picture

There are so many positives for the dollar out there, like the Puerto Rico bailout and the multi-trillion dollar pension crisis. Oil is sure to go down because who needs that stuff anyway?

tion's picture

I think people are not adequately considering how an oil covered black swan could potentially contribute to SHTF.  We really need to clean up our supply chains and lessen dependency on imported materials.  Most industries should have a stake driven into the heart of their supply chain normalcy biases and be completely rebuilt from the ground up into something more efficient with less fragility.  Rapidly increasing transportation fees could collaborate with falling dollar at exactly the wrong time, and really eat us up. 

2banana's picture

The frackers in America and Canada say no.

The financially desperate oil producers of Saudi Arabia, Venezuela, Libya, Iraq and Nigeria say no.

MK ULTRA Alpha's picture

Iraq has a long way to go before slowing down. Iraq announced a deal with Iran to develop a huge field discovered in 1999 on Iraq Iranian border. Syrian production will be coming back on line and Syria will need to pump as much as possible to rebuild and Syria needs less oil because most Syrians are either dead or are in the Euro Zone. Qatar and Iran are developing a huge gas field. And a high demand curve means Venezuela will export more, this cuts into the Kurdistan theory. There is still a tremendous supply curve to meet demand curve. Also, Russia will be able to export more oil into a price ramp. What we're seeing is speculators trying to create a reason to make money out of rumors. Supply and demand aren't at equilibrium, thus the oil price will be controlled by market forces of supply.

skunzie's picture

Don't need to read this drivel, just callin' bullshit on it.  We are supposed to believe anything from the same people who give us a constant stream of "unexpected builds" and "unexpected draws" on oil in storage.  These pricks couldn't find their way out of a garage with its door up and lighted signs pointing the way.

Non-Corporate Entity's picture

They've been timing their excuses to get the price above 50 and keep it there until winter rolls around and demand soars. People can cut down on travel but they have to heat their homes.

Shysters!

Oildriller's picture

Not unlikely we see triple digits aready in 2018. Decline rate is brutal and NOT linear.

post turtle saver's picture

Here are my predictions...

- the 2018 Saudi Aramco IPO will be a huge bust; the Saudis themselves are already hedging against that by investing in _US shale efforts_; it wouldn't surprise me if the IPO gets postponed given the tepid reception it's receiving

- all the work that's been done on oil infrastructure in the US since 2014 is going to result in record production in the US and a considerable surge in US exports; if oil prices stabilize at this level I'd be willing to bet that the US beats its production records for mbpd set in 1970; put that in your pipe and smoke it, Hubbert

- if the above happens, many of you are going to see something that you haven't seen in a long time; the US will become the #2 oil producer in the world (ahead of Saudi Arabia and behind Russia); if you think that won't have a shattering effect on OPEC's ability to set prices, you've got another think coming

- we've only see the tip of the iceberg when it comes to the capacity and innovation in US shale production; if you believe OPEC was shocked by it before, wait until prices start to go up, they can make a profit now at $50 USD/bbl and it's all gravy on the upswing; this will lure even more investors into US shale... an area where you're not paying an 85% tax to the Saudi regime or otherwise greasing the palms of third world shithole dictatorships

ZH has a blind spot when it comes to this stuff... if you _really_ want to see where the direction of oil is going, you need to look at which plays are being *** financed *** - it's finance that gets oil out of the ground when it's all said and done and finance will gravitate to where there's the most profit to be made... period, end of story