Americas News
Oil Prices Fall Back Tuesday but Demand Still Seen Supporting $70/bbl
Rising rig counts in the U.S. and Russia stating that the oil market is not yet balanced were cited as possible reasons why crude prices on Tuesday dropped after weeks of gains; however, healthy demand still underpinned prices near $70 per barrel.
West Texas Intermediate settled down 57 cents to $63.73, and Brent fell $1.11 to settle at $69.15; this came on the heels of the U.S. rig count reportedly rising last week by 10 for a total of 752 compared to 522 last year; and Alexander Novak, energy minister for Russia, telling reporters that the Organization of the Petroleum Exporting Countries (OPEC) cutback deal should continue because proper global supply and demand balance has not yet been achieved.
Still, Goldman Sachs said in a note that "This rally has been driven first by robust fundamentals, with strong demand growth and high OPEC compliance accelerating."
Rob Haworth, senior investment strategist at U.S. Bank Wealth Management, added, "All in all, this is still a pretty positive day because even though there is no news to drive prices, you're not giving up much ground here."
Meanwhile, Merrill Lynch on Tuesday said it expects the oil market to be under supplied by about 430,000 barrels per day (bpd) in 2018, up from their prior forecast for a 100,000 bpd deficit: it predicts Brent will average $64 per barrel this year, versus an earlier estimate for $56; the bank also raised its outlook for WTI to $60 a barrel from $52.
For its part, Morgan Stanley predicts strong capital flows into the oil market will occasionally push Brent prices into the $70-$75 range.
Unsurprisingly, the bullish spirit is also alive and well among hedge funds: according to data from the CFTC, hedge funds increased their WTI net-long position by 10 percent to an all-time high of 437,770 futures and options during the week ended January 9.
But not everyone is gung ho about the near future, and one expert cited a series of reasons that up until recently were widely voiced by the analytical community to explain why.
Vivek Dhar, mining and energy commodities associate director for the Commonwealth Bank of Australia,told Bloomberg television that "we do think prices have gone a little bit ahead of themselves; we're expecting oil prices to come down to about $53 per barrel by the end of the year."
He added that this figure "really is a reflection that this OPEC-led deal isn't going to do enough to control the OECD stockpiles.....what we're seeing from the data...is that 1.8 percent cuts just don't do enough; and we really need to see demand surge to curb those OECD inventories."
When asked whether OPEC would merely extend or deepen its cuts if it doesn't reach its goal of rebalancing the market, Dhar countered that "it's a matter of getting the cooperation" and pointed out that Russia has been vocal in expanding its output once the current cuts reach their expiry date.
He added that compliance in the second half of 2018 "looks shaky, particularly if prices stay in the $65 to $70 per barrel region."
Last week, pundits noted that reports of China producing so much fuel that its refiners have turned to exports to find buyers is the most obvious sign yet that a market correction is forthcoming.
