Trader’s Timeout: Oil Recovery Unlikely to Last

The resumption of production in places like Canada, Nigeria and Iran suggests that millions of new barrels of crude will

This article was written by Evdokia Pitsillidou, Risk Management Associate at easyMarkets.

Oil prices rebounded sharply on Wednesday, with US crude futures climbing back above $40 a barrel after government data showed a much bigger than expected draw in gasoline inventories. Despite the rally, the market’s bearish fundamentals remain firmly intact, making a short-term recovery unlikely.

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West Texas Intermediate (WTI) for September delivery surged over 4% on Wednesday and extended its gains into Thursday, where it added another 0.8% to reach $41.16 a barrel. WTI’s short-term indicators have improved despite continued weakness in the overall fundamental picture.

Prior to Wednesday’s gain, oil prices had plunged over 20% from their June highs, meeting the technical definition of a bear market. Prices had retreated as much as 23% through Monday when oil plumbed four month lows below $40 a barrel.

Brent crude, the international futures benchmark also rallied sharply in mid-week trading to return above $43 a barrel on London’s ICE Futures exchange.

Oil prices spiked after the US Energy Information Administration (EIA) reported a much bigger than expected decline in weekly gasoline inventories, a sign that summer driving season was resulting in higher demand at the pump. Gasoline stockpiles fell by 3.3 million barrels last week, well above the 200,000-barrel decline forecast by economists.

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The large drawdown in gasoline inventories helped to offset an unexpected rise in commercial crude inventories. Stockpiles of crude oil climbed 1.4 million barrels to 522.5 million barrels last week, confounding expectations for a decline, EIA data showed.

Despite the latest rebound, analysts are maintaining their bearish outlook on the energy markets. Record production from the Organization of Petroleum Exporting Countries (OPEC) and a global glut in refined products suggest that the market’s fundamentals haven’t really changed since the winter. The resumption of production in places like Canada, Nigeria and Iran also suggests that millions of new barrels of crude will flood the market.

Oil prices are expected to remain low through mid-2017, according to a recent forecast by US financial services company Morgan Stanley. Analysts at the bank last month said crude prices could fall back toward $35 a barrel amid renewed headwinds.

“We see worrisome trends for supply, demand, refined products, the macro and positioning that may all coalesce in late summer. Hence, our bearish bias,” Morgan Stanley said in a report that was released in late July. “We see a floor around the mid-30s given potential OPEC chatter and investor views on the cycle.”

Oilfield services provider Baker Hughes will release its latest rig-count data on Friday. The number of active rigs in the United States has risen in eight of the past nine weeks.

 

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