Oil has seen a decent revival in early February, with breakouts for US Light W&T Offshore Inc. (WTI) and Brent Crude Oil Last Day Future (BZH15.NYM) around $50, taking them out of their 1-month sideways ranges and off their near 6-year lows. Many are asking if a bottom has been reached for the price of a barrel following declines of 50-60% over the past eight months from the $100 around which they traded for around four years.
Why the Declines?
1) Burgeoning global supply and a United States focused on self-sufficiency through shale exploitation has sent US crude inventories to a near 80-year high. The US, encouraged to invest in its own expensive fracking operationsby last year’s high oil prices, is at loggerheads with an OPEC group that refuses to budge in terms of cartel output. Intent on maintaining market share in the face of rising production, OPEC is sidelining uncertainty about global growth, preferring instead to try to squeeze American frackers out of the game. A standoff has ensued with OPEC holding firm, despite potentially damaging certain smaller oil-reliant members (e.g. oil represents 92% of Venezuelan external receipts and 50% of government revenues).
2) A stronger US dollar has also hindered, derived from heightened expectations of a first US Fed rate rise in eight years and a lower oil price meaning less selling pressure from less petro dollars. The two together have resulted in the price of a barrel (and other commodities) becoming more expensive to those whose home currency is not USD.
Why the Bounce?
1) The ECB announcement on QE helped revive risk appetite and hopes that Eurozone growth could be restarted. It also saw many of the negative market bets closed/reversed. Central bank peers also remain accommodative with some even cutting rates to negative to avoid their currencies becoming too strong. This environment could keep risk appetite high, with commodities prices benefiting.
2) Oil major corporates have announced big CAPEX cuts along with their most recent trading updates. Expensive projects requiring a higher oil price are being shunned, leading to hopes of restricted supply further out.
3) The US Baker Hughes Inc. (BHI) Rig Count has fallen sharply over the past two weeks, suggesting a reduction in activity stateside and adjustment taking pace in terms of output relative to price.
4) China trade data disappointed, showing lower exports and a plunge in imports. However, this has only gone to stoke the fires of hope that more stimulus to support growth in the world’s #2 economy will be on its way soon - hence natural resources stocks/commodities prices holding up well today.
5) A bullish OPEC report forecasts cuts in global supply growth in 2015 as US drillers pull back on new production.
Where Next for the Price of a Barrel?
Having bounced from $44 and $48 respectively, immediate hurdles are $55 for US Light Crude and $60 for Brent with recent testing of the 50-day moving averages for the first time since mid-2014 a good preliminary sign. The trend of rising lows from end-Jan is also attractive, but another small drop back and bounce may be required to confirm this as the meaningful uptrend the wider markets might be seeking. Or will current highs create a near-term ceiling? The US dollar strength remains a hindrance after the strong US jobs report and upcoming data could serve to bolster it yet further. Drivers are plentiful within this complex game of US-OPEC chicken, but has the US already chickened out?
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