Oil: On a roller coaster
Norbert Rücker, Head Macro & Commodity Research, Julius Baer
The oil market is taking a breather as prices recover from recent multi-month lows. Support came from the latest rig count data, which showed the first decline since January. The oil market currently has a close eye on US drilling activity, not least as the shale production revival undermines the Middle East’s restriction efforts and nourishes concerns about the lingering oversupply. However, it remains too early to tell from one data point whether the drilling frenzy will finally cool in response to the recent price lows. In fact, drilling activity continued to pick up in the shale basins last week, but moderated elsewhere. The latest oil price er coaster was probably amplified by swings in market sentiment. Hedge funds accumulated large short-positions in oil futures contracts throughout June and likely began to take profits more recently, adding fuel to the past days’ oil price recovery.
Pessimism about the oil market’s persistent supply surplus is unlikely to disappear anytime soon. The shale drilling frenzy has to cool to prevent an increasing global market surplus. The signal for this is given by today’s prices trading in the high 40s. However, there is a time lag of up to six months between drilling and production and thus the market has yet to experience the supply surge originating from the past months’ rig count increases. Nigeria and Libya add to the global surplus with their output recovering thanks to easing infrastructure challenges.
We see prices trading sideways as growing shale output and stagnant western-world oil demand undermine the Middle East’s supply deal. With the deal’s effectiveness increasingly questioned, we believe that downside risks to prices from an unorderly and early unwinding have risen.