Americas News
US Crude Passes 6-Week High, but Analysts Unconvinced of Oil's $50-Plus Sustainability
Once more, crude on Thursday continued its winning streak, with West Texas Intermediate reaching a nearly four-month high after trading up 59 cents to settle at $49.98 and hitting a high of $50.50 per barrel; Brent increased 46 cents to $55.62 per barrel after topping out at $55.99, the highest level in five months.
Abhishek Kumar, senior energy analyst at Interfax Energy's Global Gas Analytics, cited the familiar reason for the gains: "The IEA revising up its 2017 global oil demand growth forecast, together with persistent weakness in the U.S. dollar index, has prompted bullish sentiment in the oil market."
Bob Iaccino, co-founder at Path Trading Partners, agreed: in noting crude's ascent, he called oil above $50 is "sustainable" because "the picture has completely changed" due not just to Hurricane Harvey, but the International Energy Agency report released earlier this week forecasting significant demand growth (the most in two years) and inventory depletion.
He also observed that when all refineries affected by Harvey return on line, they are "going to pump full out" rather than undergo their seasonal downturn, "so I think we're really getting some bullish momentum; this is the first time I've been this bullish in a while."
Whether it's desperation for good news after months of gloomy performance that has caused so many people to suddenly put their faith in a single report, not everyone is convinced good times are ahead.
Michael Lynch, president of Strategic Energy & Economic Research Inc., told Bloomberg there's a psychological barrier at the $50 mark, which is "still a selling point for a lot of people," plus some investors are "not convinced that the market balance is changed enough to support a price above $50 as of yet."
Eric Nuttall, senior portfolio manager with SPR & Co., remarked that for crude to sustain $50-plus, traders require "increasing clarity on OPEC's [the Organization of the Petroleum Exporting Countries] strategy on eventually bringing back barrels onto the market and the possibility of an extension beyond March."
Barclays Research seems to think an extension of the cartel's production cutback initiative is inevitable: "a softer market balance is in store for next year, which should ensure an OPEC/non-OPEC deal remains in place beyond March 2018."
Another potential hitch to smooth sailing ahead was outlined this week by Jim Chanos, president and founder of Kynikos Associates, who warned during a speech that investors are taking for granted accounting methods that mask problems with the U.S. shale business model.
Chanos says the capital spending of about three dozen drillers will eat up almost all of their earnings, minus certain expenses, this year, leaving them with little cash to service their debt: "See the problem? It's a big one."
He added that "A reliance on that EBITDA number," which allows allows investors to compare profits from drillers' operations without accounting for the other expenses,"which an awful lot of people on Wall Street still do, is going to be the road to ruin for lots of investors."
Even though the IEA report has galvanized the trading community, the agency warned that if OPEC keeps output at current levels, stockpiles are unlikely to reduce "dramatically" either this year or even into 2018.
