Latest Rally Means Nothing, Oil Will Soon Drop to the Low $30s despite OPEC Extension: Analyst

Some experts have taken solace in more OPEC countries declaring their support for an extension.

Thursday proved to be the upward climb of the oil price roller coaster, with crude gaining on the strength of recent inventory drawdowns and other countries belonging to the Organization of the Petroleum Exporting Countries (OPEC) declaring their support for an extension of the cartel's production cutback initiative, which to date has failed to bring about a significant supply/demand rebalance.

But Robert McNally, founder and president of The Rapidan Group, says the modest rebound of this past week is of no significance, and even if OPEC extends its cuts we are likely headed for crude prices at the low $30s.

West Texas Intermediate Thursday rose by 50 cents to $47.83 while Brent settled up 55 cents to $50.77, reportedly due to U.S. crude stockpiles posting their biggest weekly drawdown since December as imports dropped sharply, and inventories of refined products also falling.

This came on the heels of Iraq, Algeria, and Kuwait voicing their support this week for extending the OPEC cutbacks to at least the end of this year, and non-members Turkmenistan and Equatorial Guinea on Thursday vowing to join the cuts; OPEC will convene in Vienna on May 25 to determine their strategy for the second half of this year and possibly beyond.

But the positive response from traders on Thursday is puzzling in light of the fact that concurrent to the disclosure of inventory draws was a report that U.S. oil production C-OUT-T-EIA rose to more than 9.3 million barrels per day (bpd) last week, the highest since August 2015; this prompted Stewart Glickman, head of energy research at CFRA Research, to remark, "You're going to have to have a few weeks of 5 million barrel draws just to get back to square one."

Presumably McNally is equally puzzled by this week's modest market gains; in a CNBC editorial he argued that crude in Asia since 2014 has largely been stockpiled rather than consumed; an extension of the OPEC cuts will result in less compliance and do nothing to offset gains made by countries like Libya and Nigeria; and U.S. shale is "roaring back" - all of which will contribute to crude revisiting the low $30s by the middle of next year.

As ever, other experts offer a rosier picture: Rainer Steele, chief executive officer at OMV, told Bloomberg television that he sees oil at $55 per barrel due to the fact that earlier this year the market saw $54 per barrel and that an OPEC cutback extension will inspire market confidence.

When asked what could happen to prices if OPEC decides not to extend its cuts, Steele replied, "Oh come on; it will be below the $50s, nobody knows really."

Meanwhile, Jabbar Al-Luaibi and Noureddine Boutarfa, the oil ministers for Iraq and Algeria respectively, said in a Thursday news conference that a consensus has indeed been reached to extend the cutbacks to the end of this year.

But those who agree with the no-nonsense reasoning governing McNally's take on market conditions may be compelled to ask, So what?

In March, Bill Baruch, chief market strategist at IITrader, warned that U.S. production alone would wipe out most of the gains made during a cutback extension and that a technical breakdown of the market will soon see oil trading at $40.