Friday Crude Gains Make Oil's Best Week of 2017 - But Market Remains Range Bound

by Ship & Bunker News Team
Friday July 28, 2017

The news earlier this week of a bigger than expected drawdown of U.S. stockpiles combined with the hope that the production of renegade nations under the Organization of the Petroleum Exporting Countries (OPEC) cutback initiative will be curtailed, has resulted in another bright trading day, with Friday's performance giving crude its best week this year to date.

West Texas Intermediate rose 8.6 percent to $49.71 and Brent climbed 9 percent to $52 per barrel, capping as week of gains that have prompted some analysts to suggest that a true rebalance of supply and demand is finally underway.

Bob Yawger, director of the futures division at Mizuho Securities USA Inc., said, "You've got tightness; you had some big storage draws here in the United States.

"There's less crude oil. That's all there is to it."

The sentiment is not confined to stateside analysts: Alexander Novak, energy minister for Russia, believes the rebalancing will quicken in the second half of this year.

One reason for the shift in market performance is that Brent futures for the nearest delivery traded at a premium of 30 cents to those for the following month, the largest premium since April 2016, a backwardation that typically signals tighter supplies.

Even Goldman Sachs, which is famously cautious in assessing a market as volatile as oil, is somewhat optimistic about the way the market is heading: it stated, "While OPEC's production path remains uncertain, recent fundamental oil data have come in even better than we had expected.

"If sustained, these trends would help achieve the normalization in inventories by early next year."

Goldman added that Europe, the U.S., India, and China are driving up consumption and expects the growth to be maintained  through the second half of 2017, adding to the backwardation pattern.

However, there is still a strong belief that prices will remain range bound for the foreseeable future: Francisco Blanch, head of global commodities and derivatives research for Bank of America Merrill Lynch, told Bloomberg, "The market has become very range bound; below $45 per barrel for WTI we lose supply, above $55 per barrel we gain too much supply....we see oil average around $47 this year, around $50 next year for WTI, Brent a few dollars higher."

Tamar Essner, director of energy and utilities at Nasdaq Corporate Solutions, predicts the range will be between $42 and $55, and Roberto Friedlander, head of energy trading at Seaport Global Securities, thinks crude will remain flat over the next year at no more than $50.15.

Other experts offered food for thought: "Overall, I think the bullish demand story is taking the headlines away from the supply story as products are strong globally when refinery runs are maxed and that implies that current demand expectations could be significantly below reality," said Scott Shelton, broker at ICAP.

Earlier this week, Stephen Brennock, oil analyst at PVM, did not so much add to the cautionary comments as he did provide a much-needed bigger picture scenario by stating, "As encouraging as this may seem, the price recovery won't begin in earnest until evidence of U.S. oil rebalancing is mirrored on a global scale."