Less Than Anticipated Inventory Build Causes Market Surge - and New Fears of Looming Supply Crunch

Woodside thinks the market will be range-bound for at least 18 months.

Just when another unbroken week of lacklustre performance and losses for oil seemed certain, crude prices rose 2 percent on Wednesday on the strength of an Energy Information Administration report showing that inventories rose only half as much as expected last week as refineries increased processing.

Although a number of respected analysts had stressed that unusually high inventories - the cause for most of the consternation among investors - was at least partly due to the seasonal lull in refinery activity and that a tightening would soon occur, prices have remain range bound and in the case of U.S. crude dipped below the $50 mark.

West Texas Intermediate on Wednesday settled up $1.14 at $49.51, the best close in three weeks, while Brent rose 95 cents to $52.28 per barrel.

The EIA reported that crude inventories rose only 867,000 barrels last week, and it is said the market gains were also triggered by the agency disclosing that U.S. crude exports nearly doubled last week to climb over 1 million barrels per day (bpd); crude exports for 2016 climbed 12 percent to 520,000 bpd, with China becoming the third-biggest overseas buyer.

Yet more impetus for market players was provided by Libya, whose crude production dropped to a six month low of 500,000 bpd due to the shutdown of a pipeline that links the oil field of Sharara in the southwest part of the country to the Zawiya terminal.

The cause of the shutdown was a force majeure on Sharara crude declared by Libya's National Oil Corp., rumoured to be triggered by fighting among rival militias.

The news that inventory builds for the time being aren't as severe as expected is accompanied by the familiar worry that far from a global glut being the focus of problems, a supply crunch is looming that could cause market chaos.

Speaking at the FT Commodities Global Summit in Lausanne, Switzerland, Daniel Jaeggi, president of Mercuria Energy Group Ltd., said current project spending is focused on "short-cycle" U.S. shale deposit projects, and that "we are sowing the seeds for potential instability in the future and more volatility: you won't be able to satisfy demand with short-cycle barrels."

Ben Luckock, co-head of group market risk at Trafigura Group Ltd., agreed, noting that a shortfall could occur as early as 2020: "The low-hanging fruit on the short-cycle projects are being used now, so I am more in this camp that says we are starting to see potential issues three or four years down the track."

But the business of predicting where oil - and investment - is going wouldn't be topsy turvy were it not for contrarian experts weighing in with their opinions, and Woodside Petroleum rose to the challenge of adding a sober tone amid Wednesday's celebratory mood.

Peter Coleman, CEO and managing director for Woodside, told Bloomberg television, "I think at least over the next 18 months we'll be range bound, with the bottom end of that being about $45....the top end might be $60."

Coleman pointed out that while demand for oil is fairly healthy, "This is more of a supply issue at the moment," and floating inventory has to be worked off before substantial gains are realized.

Coleman's price forecast could charitably be called safe and is shared by Mark Yusko, CEO and CIO of Morgan Creek Capital Management, who earlier this week said crude will likely "drift from the low $40s up toward $60 by the end of the year: I think it'll be pretty flatish in the $50s during the summer, and then we'll get that last December rally into year-end like we got last year."