Tuesday Crude Gains Don't Detract From Impending Correction or Impact of Geopolitics, Say Experts

Iraq alone could upset the delicate supply-demand balance being achieved by OPEC. File Image / Pixabay

The news of U.S. crude stockpiles rising by 6.8 million barrels in the week through January 26 did nothing to halt market gains on Wednesday, with West Texas Intermediate settling up 23 cents to $64.73 - representing a 7.1 percent gain on the month -  and Brent closing up 3 cents to $69.05 per barrel.

In addition to the Energy Information Administration's report on rising stockpiles, energy companies added 12 oil rigs last week, the biggest weekly increase since March.

But despite Wednesday's gains, experts point to Tuesday's losses as a sign that the market overall is still heading towards a correction: "Whether this weakness will be short-lived or are we witnessing the precursor to a violent downside correction remains to be seen," said Stephen Brennock, strategist for PVM Oil Associates.

He added, "Still, what is apparent is that positives are increasingly in short supply for skittish buyers and the early-year optimism is hanging by a thread."

Those concerned with fundamentals side with Brennock and doubt that crude will advance much higher than $70 per barrel, especially in light of increased U.S. output: that was the contention of 34 economists and analysts surveyed by Reuters, who forecast that Brent will average $62.37 per barrel in 2018, up from the $59.88 forecast (WTI is forecast to average $58.11 per barrel in 2018, up from the $55.78 predicted in the December poll).

Cailin Birch, an analyst at the Economist Intelligence Unit, said, "Steady demand growth, a clear commitment to supply restraint by key OPEC producer Saudi Arabia, and persistent geopolitical risks will all help to keep a floor under oil prices.

"However, we expect strong production growth from the U.S., as well as some opportunistic selling by both OPEC [the Organization of the Petroleum Exporting Countries] and non-OPEC members later in the year, to prevent prices from rising much higher than $70 per barrel on average."

The concern of those surveyed about rising production is well warranted: in the case of Iraq alone, that country's goal of producing 5 million barrels per day by the end of this year caused Robin Mills, chief executive officer of Qamar Energy, to remark, "it's the country with the most aggressive growth plans that have some chance of becoming reality; at some point it's going to put some strain on the OPEC agreement."

Of course, some geopolitical issues are rapidly becoming cringe-worthy instead of worrisome, case in point: Nicolas Maduro, president of Venezuela, said a pre-sale of its new "petro" cryptocurrency will begin on February 20 and is designed to help offset the Bolivian republic's worsening economic crisis, make financial transactions, and overcome U.S. sanctions.

Critics have dismissed the initiative as illegal and nothing more than a debt issuance by Maduro's socialist government.

Claudio Descalzi, CEO of Eni SpA, last week remarked that while he would love to see $70 over the long term, he believes that level will last only for the next "couple of months" due to various issues, including activity in Nigeria, Libya, and Venezuela.