Traders Overreacting to Saudi/Russia Extension Agreement, Prices Sure to Stay Rangebound: Analysts

Some analysts believe an extension is no match for non-compliance and U.S. shale.

Unsurprisingly given the hyper-sensitive oil market, crude on Monday surged by as much as 3.6 percent due to Saudi Arabia and Russia acknowledging in advance of any formal agreement that the Organization of the Petroleum Exporting Countries (OPEC) needs to retain its production cutback initiative beyond this year.

But as West Texas Intermediate rose to $49.55 per barrel and Brent to $52.53, analysts insisted that traders are overreacting and circumstances dictate that prices will soon fall again - with everything from U.S. shale to lukewarm demand growth in China capping oil at $60 in the best case scenario.

James Butterfill, head of research and investment strategy at ETF Securities, predicted a range of between $40 and $55, noting, "Every time it goes below that $50 a barrel level, it's a buying opportunity and roughly when it hits about $50, we see a lot of selling at that point."

He added, "Every time Saudi Arabia or OPEC try to manipulate oil prices they're being undermined by the United States."

A like-minded Wang Yilin, chairman of China National Petroleum Corp., told Bloomberg that  "I don't think it's realistic for the oil price to hike significantly and continuously in the short term....we estimate that in 2017, the price per barrel will be around $50....but $60 is not sustainable."

Sam Wahab, director of oil and gas at Cantor Fitzgerald Europe, called growing U.S. production the key downside risk and pointed out that "A further nine U.S. oil rigs were added last week, bringing the total count up to 712 - the most since April 2015; it is very likely this trend will continue at current oil prices."

Others were skeptical about the efficacy of an OPEC cutback extension itself, with Naeem Aslam, chief market analyst at ThinkMarkets, writing in a CNBC editorial that "We need two things: a bigger cut by OPEC and stronger global demand [but] I do not think the cartel is ready yet to look for deeper cut; I believe it is trying to work with current production cut to yield results."

Aslam thinks this strategy is doomed the fail because Nigeria, Iran, and Libya are currently ramping up production, and the risk of noncompliance from other OPEC members is as strong as ever.

Meanwhile, in noting that shorts jumped 37 percent in the week ended May 9 and have tripled since the end of February, BloombergMarkets stated that "While the surge in bets on declining prices reflects a loss of faith in OPEC’s ability to rebalance the market, it also paves the way for a rebound when positive news like the U.S. stockpiles slump rekindles optimism; that’s because at some point short-sellers need to go on a buying spree called short-covering to return securities they borrowed and sold.

"The coming weeks will tell if that’s what’s happening."

But again, this is short-term solace; last week, Fared Mohamedi, chief economist at The Rapiden Group, used fundamentals to paint a picture of what will happen next year, and it wasn't pretty: he told BloombergMarkets, "The supply and demand balance for 2018 looks very bad: that's when the big fight is going to happen."