De­spite Ro­bust Rally, Oil Bulls Aren’t Out of the Woods Yet

The Economic Times - - Finance & Commodities -

Lon­don: Oil in­vestors seem to buy the idea that re­cov­ery is fi­nally un­der­way af­ter three years of gluts, but 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.

The oil price has gained about 20% in the last two months to above $52 a bar­rel, doggedly post­ing higher highs and higher lows, which would sug­gest this rally is more ro­bust than the re­cov­er­ies seen in March and May this year.

“It has been a good rally since June but now crude oil has to prove that it can break its down­trend chan­nel,” Petro­ma­trix an­a­lyst Olivier Jakob said.

In­vestors have been rat­tled by nag­ging doubt about the abil­ity of the Or­ga­ni­za­tion of the Pe­tro­leum Ex­port­ing Coun­tries and its part­ners to stick with a pledge to re­strict out­put by 1.8 mil­lion bar­rels per day un­til March, es­pe­cially given resur­gent out­put from Libya and Nige­ria, which are ex­empt.

A 10% rise in US pro­duc­tion this year and the painfully slow de- cline in global oil in­ven­to­ries, which Opec says must re­turn to their longert­erm av­er­age be­fore the out­put re­stric­tion can dis­ap­pear, has fed trader and in­vestor scep­ti­cism. Since Opec and its 11 part­ners, in­clud­ing Rus­sia, be­gan cur­tail­ing pro­duc­tion in Jan­uary, oil in­ven­to­ries across the world’s most de­vel­oped nations have risen by around 40 mil­lion bar­rels and are still some 200 mil­lion bar­rels above their five-year av­er­age, Opec’s tar­get.

How­ever, year-on-year, in­ven­to­ries have fallen for two months in a row, mark­ing the first an­nual de­clines in stocks in over three years, ac­cord­ing to data from the US En­ergy In­for­ma­tion Ad­min­is­tra­tion. The pre­mium of oil for de­liv­ery in De­cem­ber this year com­pared with De­cem­ber next year has fallen to just 62 cents, from nearly $2.50 at the start of July. The so-called “Dec/Dec” spread traded at an av­er­age pre­mium of nearly $4.00 a bar­rel from late 2014 to early this year, when that struc­ture turned neg­a­tive af­ter Opec and its part­ners in late 2016 reached their his­toric de­ci­sion to cut sup­ply.

But a seem­ingly re­lent­less rise in global in­ven­to­ries and dis­en­chant­ment with Opec’s abil­ity to rein in ex­ports as well as out­put drove the Dec/Dec spread to its widest in nine months by June.

In the last month, funds have cut their com­bined bear­ish hold­ings of Brent and WTI fu­tures and op­tions by more than 40% to their low­est in three months.

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