Crude Gains "Hard to Justify" in Face of Fundamentals, Warn Experts

The U.S. dollar not strengthening could be "a catalyst" for another round of  higher prices in the crude market.

Once again, crude prices are building after an early-week setback, this time with West Texas Intermediate futures on Thursday rising 55 cents to settle at $51.70 and Brent gaining 58 cents to settle at $54.94 per barrel - and once again, some experts warn that the gains aren't warranted given market conditions.

Robert Yawger, director in energy futures at Mizuho, said, "It's hard to justify the move on the back of fundamentals" - a reference to the U.S. Energy Information Administration (IEA) on Wednesday reporting an increase of 1.57 million barrels of crude inventories for a record 535.5 million barrel total, which came as a shock to traders who believed other forecasts indicating that a substantial drawdown was to occur.

Indeed, that expectation led to a brief price surge that was equally hard to justify given widespread reports of crude production increases not only from the U.S., but also from members of the Organization of the Petroleum Exporting Countries (OPEC), which has spent the better part of its three month-old production cutback initiative insisting that the market is in the process of rebalancing - despite compelling and abundant evidence suggesting otherwise.

No sooner were Thursday's gains logged than Olivier Jakob, managing director at Petromatrix, pointed out that "The U.S. crude oil production profile is a mirror image of where it was last year, when at the end of the second quarter, production was 600,000 barrels per day (bpd) lower than at the start of the year and this year is going to be the opposite.

"By the end of the second quarter, you could have U.S. production up by 1 million bpd."

Level-headed analysts who are confident about oil's long term potential seem to be wearying of the roller coaster price gains and losses: Alan Knuckman, chief options strategist at BullsEyeOption.com, told Bloomberg television that: "If we look at crude oil, crude is holding above the nifty 50, had a 5 percent push last week and is pressing on getting back inside where it traded for three months between $52.50 and $57.50: so oil is not dead."

Knuckman added that the U.S. dollar not strengthening could be "a catalyst" for another round of  higher prices in the crude market.

Meanwhile, traders are now eyeing U.S. gasoline inventories as an indicator of what may happen with crude supplies, and in this regard the stockpiles are now bigger than any year in the 21st century other than 2016, at 239 million barrels; most of the record 1.1 million bpd in exports are going to Asia, where's OPEC's cutbacks are said to be causing a tightening of the market.

Adding to the fundamentals issue is the 350,000 bpd Syncrude oil sands project in Alberta, which unnamed sources tell CNBC is expected to restart operations in the first week of May.

Although it's impossible to accurately predict prices with a commodity as volatile as oil, most experts think we'll be rangebound for most of 2017, and this was re-emphasized earlier this week by Phillip Streible, senior market strategist at RJO Futures, who remarked, "I think $53 is going to be the high end of the range; $47 if we just see the floor drop."