Brent Hits 6 Month High as Capital Economics Says Price Rally "Has Gone Too Far"

Larger falls in supply and increases in demand are required for true market stability, it argues.

News that Brent crude futures on Monday hit a six month high, settling at $48.97 per barrel, is likely not the news bunker buyers waiting for the market to turn will want to hear.

Worries about Nigerian and Canadian supply outages plus a forecast of dramatic global stockpile cuts were some of the drivers analysts said were behind the gain, which in turn pushed the average IFO380 bunker price across Singapore, Houston, Fujairah, and Rotterdam (Ship & Bunker's Global 4 Ports Average for IFO380) Monday up $18.50 per metric tonne (pmt) week-on-week to $227.00 pmt.

But neither the outages nor the gains impress Capital Economics, which in a note to clients pointed out that "We suspect that the recent rally in oil prices may have gone too far... production in Canada is likely to be fully restored by next month, bringing more than one million barrels per day of supply back to the market." 

Brent earlier in the day rallied to $49.47, its highest since early November; meanwhile, West Texas Intermediate ended at $47.72, a 3.3 percent increase.

As Ship & Bunker reported yesterday, a new forecast from Goldman Sachs seems to have been the starting point for the jump, who in stark contrast to previous warnings of a price crash as low as $20 per barrel due to global oversaturation, now states that "The oil market has gone from nearing storage saturation to being in deficit much earlier than we expected."

"The market likely shifted into deficit in May ... driven by sustained strong demand and sharply declining production."

However, Goldman Sachs adds that the market could return to a surplus in the first half of 2017 when higher crude prices make it profitable for moribund U.S. shale operators and producers in other parts of the world to resume operations; it believes the threshold is $50, a figure that, given the events of Monday, now seem easily within reach.

This is precisely the scenario that troubles the analysts at Capital Economics: in addition to triggering U.S, shale production, the London-based research house thinks Organization of the Petroleum Exporting Countries (OPEC) members, notably Saudi Arabia, might increase supply in response to the higher prices.

It wrote  "To be clear, we still expect prices to rise over the medium term (our end-2017 forecasts are US$60 per barrel for both Brent and WTI); but this will require larger falls in supply and increases in demand than we have seen so far."

Earlier this week, John Kilduff warned he that the world is still oversupplied by 1.5 million barrels per day, and does not see that the market will rebalance soon.