Julius Baer Research | Oil seemingly maintains last week’s positive momentum and prices continue to rally in early Monday morning trade. There was indeed a set of supportive news pushing Brent benchmark prices close to USD 40 per barrel.
The continuously softening drilling activity as indicated by the dropping rig count and solid labour market data confirm the views that the United States will most actively support the rebalancing of the oil market by both declining production and strengthening consumption. That said, the past days’ oil price rally was from our perspective less related to a shift in fundamentals but a recovery of sentiment.
The market crowd lost its interest in the supply glut although oil inventories continued to build in recent weeks and instead focused on the early signs of declining US oil production. The latest futures market positioning data also shows that many hedge funds closed their bets on further falling prices indicating that the past day’s up-move was augmented by short-covering activity. We still believe that oil prices experience a short-term bounce but no long-term recovery. Shale’s cost deflation, Iran’s return and Mexico’s market opening suggest that supplies remain ample for longer, overshadowing the industry’s investment cuts for the time being. The running dry of petro-dollars remains the key theme to watch.
Supply glut fears have taken a back seat as of late with the oil market’s focus shifting from pessimism over ample inventories to optimism over declining US production. We still believe that oil prices experience a short-term bounce but no long-term recovery but see further upside in the near term.
*Image: Flickr/ Chris Protopapas