Crude Rebound Just a Pause Before More Market Losses, Say Analysts

Thursday saw crude rebound slightly after an extended duration of market losses, with West Texas Intermediate rising 21 cents to settle at $42.74 and Brent up 44 cents to $45.76 per barrel - but analysts caution that the upswing is only temporary and fundamentals ensure continued turmoil.

Against a tableau of steadily increases in U.S. shale production, rising output from Libya, Nigeria, and other renegade members of the Organization of the Petroleum Exporting Countries (OPEC) and demand forecasts that are contentious at best, Sarp Ozkan, analyst at Drillinginfo.com, said, "There is nothing fundamentally different about supply and demand to be bullish about; the sentiment is rightfully bearish."

John Kilduff, founding partner at Again Capital, remarked that the supply rebound has caused a global glut relapse, "with various regional markets swamped with crude oil, ranging from the Atlantic Basin to the North Sea to Singapore."

Kilduff believes the only way for crude prices to escalate is if the Syrian conflict intensifies between U.S./Saudi Arabia and Iran/Russia/China: in the meantime, he speculates that "The most likely way forward for prices is lower still, into at least the mid-$30 range, which is worth playing for (read: short)."

Not everyone is as pessimistic as Kilduff: Steve Brice, chief investment strategist for Standard Chartered Bank, told Bloomberg television that a test of the $40 level "can't be ruled out" but the market is nonetheless tightening, "it's just not tightening as quickly as people anticipated."

He went on to say that he expected Organization of the Petroleum Exporting Countries (OPEC) members to abide by their recently extended production cuts, that relief would be had as the summer driving season deepens, and the embargo against Qatar by Arab states could lead to rising demand for crude in the Middle East: "so we do expect oil prices to bottom out in the next month or so."

Kelvin Tay, regional chief investment officer for southern Asia-Pacific at UBS Wealth Management, CIO Office, told Bloomberg television that he sees a recovery in prices, based partly on demand and the fact that under-investment will tighten existing supplies.

Brice and Tay's guarded optimism aside, experts tend to favour Kilduff's outlook, and earlier this week Daniel Yergin, vice chairman of IHS Markit, warned that Tuesday's $42.53 per barrel WTI showing "is not very far from $39" and prices could drop even further before the sell-off ends.