A long way to breaching $50/barrel
Pierre Melki, Equity Analyst Global Equity Research at Union Bancaire Privée, provides a commentary on the oil market.
Year to date, the MSCI Energy is underperforming the MSCI World by more than 23 per cent.
Despite the upward revisions in demand from the Energy Information Agency, the barrel did not manage to break the $50 price due to mixed signals surrounding worldwide supply and demand. On the one hand, the large decrease in US crude oil inventories, a fall in rig count from 768 to 765 and the rise in demand for oil in the Middle East and China combined to support oil prices. On the other, a continuing growth in US oil production now at its two year high of 9.50 million barrels and declining investor confidence in OPEC deal compliance continued to put downward pressure on the barrel.
It is interesting to note that the spread between WTI and Brent hasn’t been so wide in two years reaching $4.21 on the 18 August. Because of oversupply in the US, the WTI future curve is increasingly turning into contango as buyers are willing to pay more for future delivery to avoid storage and insurance costs. For Brent, buyers wants earlier delivery, signalling a shortage and turning the future curve into backwardation for the first time in three years.
When OPEC and Russia decided on their strategy in November 2016, they expected it to succeed within six months; it now looks like it could take years. Apart from a political issue, too many events have to align in order for the OPEC strategy to succeed and reduce the oversupply in the short term: lower US crude inventories, declining US shale production, higher compliance from OPEC members, reduced output from Nigeria and Libya (not included the OPEC deal), and an increase or stabilisation in demand. Any weakening in one of these factors, will delay the goal of the cartel to push global oil inventories below the five-year average.
OPEC is meeting again on 30 November in Vienna to discuss whether to extend or end the agreement to cut oil production. Unless political tensions in Libya and Venezuela continue to escalate and hinder crude oil supply, we believe that the path to success is still long and before we see US shale production diminishing, prices will not break significantly above the $50 barrier.