How far can the oil rally go?

NEW YORK: Another week of rising oil price and another record for money manager bets on gains. But can it last?

With wagers on rising West Texas Intermediate and Brent crude futures mounting to new highs and the global benchmark hurtling through US$70 in the face of depleting stockpiles, the bulls seem to have control of the market. But, warnings of a retreat are coming into view.

“The question in my mind is, how far can this market go?” said Rob Haworth, who helps oversee US $150 bil in assets at US Bank Wealth Management in Seattle. The higher oil prices go, the more likely it is Opec will have second thoughts on their supply cuts and that shale production will rise, he said.

So far, so good.

The Organisation of Petroleum Exporting Countries is committed to keeping its output curbs in place for the rest of year, United Arab Emirates Energy Minister Suhail Al Mazrouei said last week. The US supply picture has shown shrinking inventories, with storage at Cushing, Oklahoma below the five-year average.

The global stockpile surplus has almost vanished and demand growth is strong enough to absorb increases in US crude output, according to Energy Aspects Ltd’s chief oil market analyst, Amrita Sen.

But Goldman Sachs Group Inc warns that Opec would try to talk down an oil rally above US$70 a barrel to cushion the impact on the global economy and rival supplies. Russian Energy Minister Alexander Novak said Friday producers regularly talk about options for winding down the supply-reduction deal.

Iran’s Oil Minister Bijan Namdar Zanganeh even admitted that Opec doesn’t like crude above US$60 because of shale oil. The statement comes at the same time the US government is forecasting output this year and next to reach record levels.

Even though US explorers have hinted they’ll stick to conservative spending budgets, the oil rig count rose by 10 last week, the biggest addition since June. And they have been hedging like never before, meaning they are more protected than ever to keep producing even if prices drop.

“Will these producers be disciplined or not? There really isn’t a clear read on that. There is this dichotomy between what people are saying and what their actions are suggesting,” said Tamar Essner, an analyst at Nasdaq Inc in New York. “Hedging is at very high levels. The rig count is going up. The actions tell a slightly different story than the words.”

A number of experts don’t seem to be getting too excited over crude’s recent rally. It’s premature to expect to see a further price rise, at least until the market gains a better grasp of the pace of US production growth, according to RBC Capital Markets. UBS Group AG cites the potential of record output weakening prices over the course of the year.

Bank of America Merrill Lynch’s head of commodities research, Francisco Blanch, said in order to see prices remain near US$70 a barrel, heightened demand momentum needs to continue for the entire year.

Hedge funds increased their WTI net-long position – the difference between bets on a price increase and wagers on a drop – by 10% to 437,770 futures and options during the week ended Jan 9, the highest in data going back to 2006, according to data from the US Commodity.