Analysts Worry that Oil Rally Will "Run Out of Steam Soon"

Analysts say on-going global stockpile increases are a cause of concern.

Falling U.S. production and a 5 percent drop this year in the U.S. dollar may be factors underscoring an 80 percent jump in oil prices from the decade lows suffered earlier this year, but analysts warn that continued increases in global stockpiles will undermine the rally.

In predicting that Brent might average $45 per barrel in the third quarter, Eugen Weinberg, head of commodities research at Commerzbank, says, “I’m very concerned that this rally might…run out of steam soon; everybody’s focusing on the falling U.S. production but there’s a lot more crude coming from other places.”

Commerzbank was one of 13 investment banks surveyed by The Wall Street Journal, which found that in addition to worry over an end to the rally, the rally in itself is nothing to write home about: Brent crude’s 2016 average of $41 per barrel is up by only a dollar from when the survey was conducted last March, while West Texas Intermediate at $39 per barrel remains largely unchanged.

Meanwhile, Morgan Stanley told the survey that “Doha’s failure could setup a market share war with many producers now calling for growth” – a reference to the failed talks between major producing nations to curb output potentially opening the door for yet more oil to flood the market.

Moreover, Citigroup estimates that Iranian exports are about 2 million barrels per day (bpd) this month, which is near pre-sanction levels of 2 to 2.5 million bpd.

Gareth Lewis-Davies, senior commodity strategist at BNP Paribas, was slightly more upbeat in responding to the survey: while conceding that “We still have a big oversupply to worry about,” he noted that “We are already seeing signs that the market will balance eventually, probably at the turn of the year.”

Still, The Wall Street Journal illustrates the level over overall analyst pessimism this year by pointing out that the same banks surveyed in 2015 predicted Brent would exceed $70 per barrel in 2016, but “hitting that level has now been postponed to 2018 by these analysts.”

One analyst who didn't participate in the survey has distinguished himself amongst the pack of prognosticators foreseeing where the market will go in the near future: Mike Rothman, founder of Cornerstone Analytics, disputes the contention that the market is being oversupplied by as much as 2 million barrels a day and is convinced that oil will hit $85 by the end of this year.