More Crude Gains Mean Little for Canada and May Herald a 10-15 Percent Correction

Commerzbank says fundamentals don't support the current degree of trading strength. File image / pixabay

Yet again, geopolitical tension in the form of continued anti-government protests in Iran as well as concern about stability in the Middle East overall caused traders to propel crude upward on Monday: West Texas Intermediate rose 29 cents to $61.73 per barrel, while Brent climbed 17 cents to $67.79.

But those focused on fundamentals argue that the delicate state of the crude industry does not warrant these gains, and they insist a substantial market correction is coming.

Eugen Weinberg, head of commodities research at Commerzbank, told CNBC that the oil price rally is "definitely due to massive overheating of the speculators and is likely to correct over the next month," referring to the fact that long positions have skyrocketed while short positions in recent weeks have dipped to their lowest levels since February.

Weinberg added, "(I expect) the price of oil to correct by at least 10 to 15 percent over the coming months because the current fundamentals are not justifying this kind of strength."

Another basic concern about the market was expressed Monday by Ric Spooner, chief market analyst at CMC Markets: "The U.S. oil price is now into a range that is anticipated to attract increased shale oil production.

"Traders may decide that discretion is the better part of valour while markets wait on evidence of what happens to the rig count and production levels over the next couple of months."

Abhishek Kumar, senior energy analyst at Interfax Energys Global Gas Analytics, was more succinct in his appraisal of the market: "Prospects for further increases in U.S. oil production amid recent improvements seen in oil prices continue to promote bearish sentiment."

While American producers maybe salivating over crude's latest gains, $60-plus oil is doing little to inspire their Canadian counterparts in Alberta: Todd Hirsch, chief economist at ATB Financial, said, "We like to see a higher price because it is a major commodity in Alberta and it was the single reason … that Alberta was thrown into a recession.

"The fact that we're seeing oil prices not only stable but creeping up above $60 is, on the surface, good, but I think there are other things here to talk about," specifically, the differential between benchmark Canadian and U.S. oil having widened to its biggest gap in years, with a barrel of Canadian crude trading for roughly $25 less than WTI due to transportation bottlenecks and overabundant stocks.

But even though fundamentals should dictate trading patterns, it seems geopolitical tension will continue to sway  investors, even though the tensions to date have done little to interrupt supply; Stephen Innes, head of trading for Asia/Pacific at Oanda, said Middle East turmoil will remain a key focus for oil markets, which he warned had the potential to "send oil prices rocketing higher."

Last week, Norbert Rucker, analyst for Julius Baer, said crude prices would not rise above $60 for the bulk of 2018 because concern over production disruptions in Iran notwithstanding, "Disruptions in the North Sea have been removed with the Forties pipeline system having resumed full operations [and] U.S. oil production surpassed the 2015 highs in October and is set to climb to historic highs this year."