Oil has had a terrible run over the past year, but perhaps the darkest hour has passed. WTI Crude peaked at around 100 last summer and has traded virtually straight down since then.
Between February and summer of 2015 there was one limited bounce that put about 20% back onto the price of crude. Even this fizzled and the price slumped by another third virtually overnight, falling under the psychologically important $40/barrel mark in late August during the broader market rout.
Early September brought an incredible 3-day 25% surge higher. It was a sight to behold, with oil that had been under $40 just days before then threatening $50/barrel moments later.
But the surge fizzled out pretty fast, prices fell from $50 back to $45 and have traded entirely sideways since then. Until this week, that is. Over the past couple days, oil has started to get its groove back, moving up to $48 at the moment this is being written. The key $50/level is in sight, should oil break above that, a sustained rally can be expected.
First up, markets in general are enjoying a much-needed relief rally after a very difficult third quarter of the year. Global markets have been on steroids to kick off October, the S&P 500 is up 5% in a few days and the Dow has put on 900 points since last week’s low. Good stuff for improving general morale.
It’s not surprising that oil and other beaten down assets would enjoy a wave of buying as global confidence rebounds. Adding to that, a sizable short squeeze has developed in the commodity space. Numerous small-cap oil and gas stocks have risen 50% or so over the past week. Mining stocks are flying.
Even beleaguered larger-caps like Brazil’s state-run oil giant Petrobras (PBR) are up 40% in a couple weeks. With this sort of investor flood back into commodities, it’s not surprising that a large number of people betting against oil are starting to pull their bets.
Finally, geopolitical trouble is greatly aiding oil’s cause. Political tensions are rapidly building in the Middle East as unease regarding the Syrian situation mounts. Russia and the West are escalating their rhetoric, and a broader move toward a more regional conflict may ensue.
In a related move, Israel has blocked access for all Arabs to the Old Jerusalem following a recent violent incident. Muslims across the region have denounced the move as an unprecedented move of Jewish aggression.
Those are just the sorts of moves that aid oil’s short-term outlook. However, it’s not all positive either.
Oil faces continued problems on the supply and demand front. Wednesday’s crude oil inventories report showed that US domestic oil supplies of both crude and refined gasoline spiked higher, sharply against consensus expectations.
This is particularly telling in that US refineries have sharply cut production levels in recent weeks to respond to falling margins. So there should have been a fall in the level of stored refined gasoline. Instead we got another surge in build-up.
November crude oil, which had been trading as high as 49.60 before the report slipped 2% back to 48.50 on this writing.
Furthermore, Saudi Arabia cut its oil prices sharply Sunday in an effort to head off competition from other OPEC members and maintain its market share as it faces a cash crunch caused by the fall in crude.
And Iran is coming online shortly with more oil as the sanctions against that nation end. It’s estimated Iran will add 500,000/barrels a day to global supply immediately and another 500k in the intermediate term. For a market that is already an estimated 2 to 3 million barrels a day oversupplied, this adds a lot more unneeded production.
In balance, it seems the bullish factors for oil are more based on sentiment and short-term factors whereas the longer-term bearish case seems more based in more concrete realities. Oil may make it over $50/barrel, but there’s not a lot to keep it there at this point. Be careful chasing oil and energy stocks higher after the big move up they’ve already had.