Oil Rally Looks Like Last Year's False Recovery: Commerzbank

by Ship & Bunker News Team
Monday May 2, 2016

Having spent most of last week warning that the current oil price rally is driven by the weak U.S. dollar and will soon fizzle because global stockpiles are increasing, Eugen Weinberg, head of commodities research at Commerzbank, is now warning that crude's gain disturbingly resembles the false recovery that occurred this time last year.

"There are dangerous parallels to 2015; the market already appears overheated and a correction is overdue," Bloomberg quoted him as saying.

Giovanni Staunovo, an analyst for UBS Group AG, agrees: "The price strength in crude oil is on very thin ice."

In May of 2015, traders anticipating a rapid decrease in U.S. production caused Brent to rise 45 percent from January to almost $68.

But the rally reversed when production kept rising and peaked at 9.61 million barrels per day in June.

Harry Tchilinguirian, head of commodity markets strategy at BNP Paribas, said the 2016 rally "may be self-defeating as it throws a life-line to U.S. shale producers."

BNP believes prices must revert into the low $30s and stay there in order for high-cost production to retreat sufficiently – in other words, long enough to strangle investment in the U.S. shale industry.

But if U.S. producers are in store for more hurt, so too are the Gulf countries producing at near record levels in their determination to control the market: in Saudi Arabia's case, skyrocketing youth unemployment and an anemic economic growth this year of 1.5 percent has caused the kingdom to propose massive reforms that will spread the pain of the low oil prices amongst the general populace.