Brian BollenA small rise in price is the story in oil this morning. Brent Crude is trading above US$50 per barrel, according to data from CNBC.com. WTI Crude is also up modestly at $48.27. In other commodities, copper futures are up.
A range of factors is identified as being responsible for the oil rebound as changes take place in supply and demand.
A statement issued following the Joint OPEC-Non-OPEC ministerial monitoring committee (JMMC) in St Petersburg referred to steady and significant progress towards rebalancing in the oil market.
Global recovery is underway
“The continued strengthening of the global recovery is underway, with stability in the oil market remaining a key determinant,” it reads. “The market volatility has been lower in recent weeks and investment flows have visibly started to improve in the industry.
“Oil demand is expected to increase significantly in the 2H17 compared to 1H17, with the growth reaching a level of 2 mb/d (millions of barrels a day), which should sustain the inventory draws.
“Furthermore, the participating OPEC and Non-OPEC producing countries achieved a conformity level of 98% in June 2017.
“In addition, same level of high conformity was observed for the first six months of January to June 2017. Between January and June 2017, the participating producing countries adjusted their production downwards by an estimated volume of 351 mb.”
Stock overhang falls
“Also, the overhang of OECD commercial oil stocks over the five-year average level has fallen by 90 mb for the period from January to June 2017 and now stand at 250 mb.”
The JMMC further noted that existing oil market trends are resulting in moderation of future supply growth.
Shale oil projects which have been the source of sizable share of oil supply growth in past three years are going through a period of slowing well productivity, accelerating cost inflation, deceleration of rig count growth and constrained capital market access.
Share on Shale
On this point, Michael Baxter, economics spokesman for The Share Centre says: "Shale gas is fundamentally a variable cost, its output can be turned up and down, not quite like a tap, but not far off. I suspect that for the time being the equilibrium price of oil is around $50.
“Oil from conventional sources will react very slowly to changes in price, shale gas output much more quickly, this may explain recent movements in the oil price and supply of shale."
Continued low imports of Saudi crude oil and firm domestic petroleum demand are likely to lead US oil inventories lower, according to an S&P Global Platts preview of this week’s pending US Energy Information Administration (EIA) oil stocks data.
The S&P Global Platts survey of analysts shows
- Crude stocks to fall 2.5 million barrels
- Gasoline stocks to fall 1.25 million barrels
- Distillate stocks to fall 800,000 barrels
- Refinery utilization to rise 0.5 percentage points
Says S&P Global Platts Oil Editor Jack Laursen: “Drawdowns have helped eat away at the U.S. surplus. Stocks as of July 14 remained nearly 26% greater than the five-year average tracked by EIA data.
“But that is down from levels seen at the start of 2017, when stocks were more bloated, 37% greater than the five-year average for this period. Over the same time period, long-term time spreads have narrowed sharply.”
Fall in imports
One factor helping US crude stocks decline is a fall in imports, he adds. Platts trade flow software cFlow shows that less than 20 million barrels shipped from Saudi Arabia to the US in June.
This was down from 24.4 million barrels in May and 44 million barrels in December 2016, before the OPEC/non-OPEC output cut agreement came into force. Shipments from Saudi Arabia typically take upwards of 30 days to reach the United States.
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Commerzbank of Frankfurt said in a note this morning that the pronounced 10.2 million barrel reduction in US crude oil stocks reported by the American Petroleum Institute drove the Brent price up by over 4% for a time yesterday.
This allowed it to close above the $50 per barrel mark for the first time since early June.
Do not overinterpret
“We would not overinterpret these data as a sign of strong demand, however,” says Commerzbank. “We attribute the latest inventory reduction first and foremost to significantly lower imports.
“Saudi Arabia in particular has been trying recently to accelerate the inventory reduction in the US by shipping less oil there in the hope that this will push up prices in the short term.
“High-risk appetite among market participants, as reflected also in rising stock markets and bond yields, in conjunction with renewed depreciation of the dollar, lent noticeable buoyancy to metals prices yesterday. Gaining by over 4% for a time, copper was the biggest winner.
Copper price rally continues
“The price rally is continuing for the time being this morning, copper climbing by another nearly 3% to $6,400 per ton, its highest level since May 2015. The fact that it exceeded the $6,000 per ton mark appears to have attracted many buyers.
All other base metals are likewise on the up, most of them significantly, observes Commerzbank. Nickel is trading above the $10,000 per ton mark again for the first time in 3ó months.
A positive economic outlook for China is repeatedly cited as the reason for the price rise, and the day before yesterday saw the IMF slightly raise its growth expectation for China this year and next.
We do not share the optimism
Commerezbank says it does not share this optimism. It actually expects growth in China to slow in the second half of the year. What is more, it adds, the rise in metals prices is again likely to have been driven largely by speculation.
Even last week speculative financial investors on the LME significantly increased their bets on climbing copper prices, thereby contributing to the price rise. Net long positions in nickel were also built up in grand style: they were expanded by 43% in the last two weeks.
This explains why the price gained for a time by nearly $1,000, Commerzbank concludes.
