Analysts Dismiss Crude Gains as Momentary, Warn of Further Losses

Barclays suggests the economy won't support any meaningful rally: File Image/Pixabay

Thursday's crude trading activity proved yet again that the fortunes of the volatile commodity can turn on a dime: in this case, a dramatic reversal of recent losses based on the expectation that falling oil prices may inspire the Organization of the Petroleum Exporting Countries (OPEC) to enact more production cuts.

Brent ended Thursday's session up $1.15, or 2.1 percent, at $57.38 per barrel, and West Texas Intermediate rose $1.45, or 2.8 percent, to settle at $52.54 per barrel.

Saudi Arabia was credited for the gains, due to the kingdom earlier this week signalling that it is consulting with other producers to find ways of reversing the recent slide in crude prices (Middle East countries in particular have a vested interest in higher prices for the health of their economies).

Edward Moya, senior market analyst at OANDA, remarked, "Saudis are scrambling to send a signal that will stabilize oil markets....with energy prices heading for the worst weekly close since December, we should not be surprised to hear more rumors that OPEC may be considering increased production cut efforts ahead of a key summit that is tentatively planned for the second week in Abu Dhabi."

Thursday's gains were also said to have been supported by China's yuan unexpectedly strengthening against the dollar and its exports returning to growth in July on improved global demand, despite the trade war with the U.S.

Crude was also helped by Genscape data showing that inventories at Cushing, Oklahoma, the delivery point for WTI, fell about 2.9 million barrels in the week to August 6.

However, analysts warned against anyone assuming Thursday was anything but a momentary blip in an otherwise disappointing crude trading year: "Today's price rebound across the energy spectrum looks like a normal correction from a short-term oversold technical condition," explained Jim Ritterbusch, president of Ritterbusch and Associates.

He added, "While some Saudi overtures of additional output restraint, a softening U.S. dollar and lift in global risk appetite are facilitating today's rally, we are not viewing this as the beginning of a sustainable advance by any measure."

Indeed, Barclays on Thursday suggested that grim economic data will continue to negatively impact oil by stating that "we are in an industrial recession," with 33 percent of the building, energy and manufacturing companies (including Caterpillar and Samsung) it monitors reporting sales declines in the second fiscal quarter.

Julian Mitchell, industrials analyst for Barclays, wrote, "What is concerning is that when we look at our forecasts (which have typically been lower than the street ⁄ Co guidance for organic sales, since our initiation), they embed only eight companies having organic declines in the 2H19.

"This looks too optimistic now, given the recent trade news, and some of the corporate commentary in recent days regarding how the demand slowdown is spreading beyond auto and electronics."

Meanwhile, Brian Sullivan, anchor at CNBC's Worldwide Exchange, pointed out that while crude has fallen the last few months both in North America and around the world, U.S. oil stocks have fallen a lot more -  especially in high cost producing areas: "The stocks have completely decoupled from oil and gas names, they have lost, the XOP, 71 percent over five years."

"Investors can't run away from energy stocks fast enough."