Crude down Again as Analyst Declares $50 Oil to Be at High End of Range

Thursday August 3, 2017

More distance between the market optimism expressed by some analysts last week and brutal reality occurred Thursday as U.S. crude fell 1.1 percent due to concerns over growing output from the Organization of the Petroleum Exporting Countries (OPEC) - and once again, some experts suggested that $50 oil, recently considered a disappointing level for the commodity, is actually the high point of a downwardly trending scale.

West Texas Intermediate settled down 56 cents to $49.03 per barrel and Brent dropped 35 cents to $52.01 per barrel; this was despite a recent report from the Energy Information Administration showing record gasoline demand of 9.84 million barrels per day (bpd) for last week, and a decline in commercial crude inventories of 1.5 million barrels to 481.9 million barrels, below last year's levels and a sign of a tightening U.S. market.

The reason for the losses, traders told CNBC, is high production from OPEC: specifically, news earlier this week that the cartel hit a 2017 high of 33 million bpd in July, up 90,000 bpd from the previous month.

Accordingly, National Australia Bank analysts said in a note to clients, "Our view of the oil market is that a major rally is unlikely in 2017; absent further production cuts or a sustained uptick in demand, prices are likely to remain in the low to mid $50s for the remainder of the year."

Rising U.S. production is also a source of concern: Bloomberg notes that production at its highest since July 2015 (an increase of 20,000 bpd to 9.43 million last week) and shale producers like EOG Resources Inc. boasting higher production targets (to the tune of 10 million bpd next year) in their earnings reports "dampened sentiment."

All of this compelled Charlie Diebel, head of rates at Aviva Investors, to tell Bloomberg that "we tend to think, especially as the summer driving season winds down in the U.S., that you're going to actually start to see oil moveĀ  a bit lower, down to $40 per barrel."

He added that $50 oil "is the upper end of the range as far as we're concerned," and that "global growth is decent but it's not going to accelerate away."

Bart Melek, head of global commodity strategy at TD Securities, echoed that sentiment by remarking, "In the end, it looks like we are continuing to see lower inventories, not only on the oil side, but also on the product side.

"Demand remains quite robust," but prices won't improve "until there is more certainty surrounding OPEC policy and what the fundamentals will look like into next year."

Last week, Stephen Brennock, oil analyst at PVM, provided the big picture of what needs to happen to shake the market out of its range-bound doldrums by stating, "As encouraging as this may seem, the price recovery won't begin in earnest until evidence of U.s. oil rebalancing is mirrored on a global scale."