Oil market is rebalancing, but could yet skid on the slick

Oil market is rebalancing, but could yet skid on the slick

Submitted by alvin on Fri, 2016-05-13 10:28 Despite the Doha debacle, markets are firming up with some now saying that it could begin balancing early next year. Speculators are back in play, betting on the worst being over and the glut easing. Strong gasoline consumption in the United States, increasing signs of declining production around the world and oilfield outages have underpinned a return to investment in the sector. Analysts and brokers however, are pointing to momentum from investors’ broadly buying back into the commodities sector, as fueling the current Bull Run. Commodity hedge funds received more money than they redeemed in March, the seventh-straight months of inflows, data from eVestment underlined last month. The trend reversed a long period of declines, and the funds added $4.1 billion in the first quarter, their best quarter nearly seven years. Markets also took note of the fall in U.S. output, to 8.953 million bpd mid last month, down from the peak of 9.7 million bpd a year earlier. The hope of markets rebalancing from the current surplus in supply hinges basically on the possible decline in US oil production. The US accounted for the bulk of non-Opec’s 2016 oil supply contraction of 700,000 barrels per day forecast. Markets are bullish despite rather weak fundamentals. To what extent the Bull Run would sustain is open to speculation. “The sentiment in commodity markets has clearly shifted towards being more bullish,” said Jeffrey Currie of Goldman Sachs in a note to clients. But “we believe that it is not yet driven by a sustainable shift in fundamentals.” Fundamentals are indeed not back to normal and could be stretched further if Russia, Saudi, Iran and others open the taps further. All these have the potential to counterbalance the loss in U.S. output. And it was apparently in this perspective that the Goldman Sachs note underlined; oil markets aren’t likely to shift sustainably until at least the third quarter, warning all these could be setting up the market for a fall in the meantime, too. “While these adjustments deal with near-term surpluses through oil supply disruptions…they do not address the longer-term supply problems of excess capacity,” Currie said. “We believe the current decline in U.S. oil production is still insufficient to offset low-cost supply growth such as Iran, particularly should disruptions in Iraq, Nigeria and Venezuela reverse.” The oil market has not yet returned to a balance of supply and demand factors, leaving the market oversupplied for much of this year,” said Rob Haworth, senior investment strategist at the Private Client Reserve at U.S. Bank. The head of the Oil Industry and Markets Division at the International Energy Agency (IEA) told CNBC on Friday that he believed producers will continue to “pump as much oil as possible”. “In the post-Doha world, when we’re still in what is essentially a free market for oil, they (the Russians) will pump as much oil out as the market will absorb and the Saudis have said much the same thing,” Atkinson emphasized. Atkinson noted that “as far as the Russians are concerned, even in the run-up to Doha when they were going to be party to an agreement to freeze production, they were actually pumping up production anyway.” “The disorderly breakdown in talks on Sunday signals producers are going to start to maximize their export volumes,” Financial Times quoted Bill Farren-Price, head of Petroleum Policy Intelligence, as saying. If that proves correct, the cosy consensus that had been building in the oil market — that supply and demand were finally starting to come into balance, — may be threatened. Analysts at Credit Suisse say that if Opec countries “turn their oil amplifier up” and try to maximize output, then the market will not rebalance until 2017 at the earliest. However, Fatih Birol, the IEA Executive Director, is taking a longer view of the markets – from a macro level. After meeting Japan’s Prime Minister, Shinzō Abe, Birol told reporters in Tokyo that production outside the Opec was expected to fall sharply this year, by almost 700,000 barrels a day, underlining that markets could rebalance at the turn of this year, or by 2017 at the latest. “This year, we are expecting the biggest decline in non-Opec oil supply in the last 25 years, almost 700,000 barrels per day. At the same time, global demand growth is in a hectic pace.” He added: “When we look at all the fundamentals – demand, supply and stocks – I have all the reasons to believe that in the absence of a major economic downturn we are going to see balance in the markets latest by 2017.” All of a sudden – and despite the Doha fiasco - the outlook does not appear too bleak. That’s is oil business!