Crude Market Up Friday on Indications of Strength Beyond Peak Demand Season

Analysts warn that many challenges lie ahead in the near term. File Image / Pixabay

Analysts who earlier this week complained that fundamentals deserved better crude prices than were being posted were rewarded Friday when West Texas Intermediate settled up $1.42 to $48.51 per barrel and Brent advanced by $1.69 to settle at $52.72 - with the upward mobility attributed in some quarters to a tightening market.

Specifically, analysts point to the fact that despite a 13 percent jump in production since mid-2016 to 9.5 million barrels per day (bpd), the U.S.'s commercial crude inventories have fallen 13 percent from their March records to below 2016 levels.

More importantly, the global physical market is perceived to be strengthening beyond the seasonal peak in demand: Clayton Rogers, an energy derivative broker at SCS Commodities Corp., said, ""Brent spreads are ripping, U.S. crude stocks are drawing rapidly."

Bloomberg noted that the price gap between individual grades of crude and widely traded markers like Brent or WTI have strengthened over the last two weeks, even for barrels scheduled to be shipped in weaker demand periods such as late September and October.

Harry Tchilinguirian, head of commodity markets strategy at BNP Paribas SA, observed, "The real action has been in the time spreads: a lot of the focus is moving away from what oil is trading at in terms of levels, towards how the structure of the curve has significantly changed."

Now that the peak demand season is waning, Bloomberg says analysts are anticipating data showing how big that season actually was: because periods of high demand provide the Organization of the Petroleum Exporting Countries (OPEC) with the best opportunity to make a dent in swollen crude stockpiles.

The agency believes that by the group's next meeting on November 30 it will be clear if its troubled production cutback initiative has had any positive impact in achieving a supply and demand rebalance.

Meanwhile, the analytical community suggested that Friday's crude prices should only be a momentary cause for celebration: the main points of concern such as renegade production from some OPEC members, the on-going U.S. shale boom, and weak demand forecasts in many parts of the world remain unchanged.

Plus, said Mike Wittner, head of oil market research at Societe Generale SA, fundamentals are "strong now, but bearish seasonality for crude and products is just around the corner."

Earlier this week while announcing a downsizing of its crude price forecasts, Citi stated that U.S. shale and improved outlook for projects in Mexico, Canada, Brazil, and other countries will sustain the market and cap prices at $60 per barrel through 2022 - but it added that the range between 2018 and 2020 will be between $40 to $55.