June, and the end of the first half of the year, is approaching rapidly. Crude oil has disappointed, by and large, at least if you’re bullish on black gold. The bears, on the other hand, have been delighted. For most of the first half of the year, oil prices floated heavily like a slick on the waves, unable to rise over $57 per barrel.
The Opec’s supply tightening had an initial positive effect on the price in January. It rose to just over $56 per barrel. Staying up there proved to be a challenge, and the price declined steadily in the months that followed. At the time of writing at the end of April, WTI is at $49 per barrel and Brent is at $52.60, pressured by the ever-increasing number of US oil rigs. At the moment, it’s all about the Opec versus US shale, supply tightening against supply loosening. The game seems evenly-matched; neither side can gain much ground except for the territory between $50 and $55 per barrel.
Looking ahead to the second half of the year, I am expecting the same fundamental factors to control the oil markets. The Opec versus US shale, with geopolitical tensions as a lesser factor. Barring a critical event like outright war in one of the bigger oil-producing countries, geopolitical risks are dominated by the battle between oil groups. There is an upside scenario that has bulls excited. An increase in oil rigs is a strong signal that demand is expected to rise in the near-to-medium term. Question is, when will it outstrip the currently abundant supply? Not until the end of 2018 if you believe monitors like the IEA. Meanwhile, traditional oil producers like Saudi Arabia are set to see their revenues fall. The IEA estimates a drop to $320 billion in 2016 from a peak of $1.2 trillion in 2012. So the squeeze is likely to stay on for at least another year-and-a-half for GCC countries.
On the downside, traders are sceptical that the Opec’s tightening can make much difference after June. The headlines may have a temporary effect on sentiment, but the hard numbers are the only way to impress the markets at this point. Speculation is that the US may strongly boost its crude oil exports while cutting imports. Should this trend become significant, what would happen to the price? As long as stocks are abundant, it would likely stay pressured. I’m watching US and China GDP results for the first quarter, as these would feed directly into demand for oil. The key word in the global economy is recovery.
We’re still a delicate transition point at the halfway point between bust and boom. China narrowly avoided the expected slowdown, maintaining growth at 6.9 per cent in the first quarter.
If the US performs better-than-expected in the first quarter, it’s a favourable start.
All things considered, I’m neutral on oil and expect it to range between $50 and $60 per barrel in the second half, barring any critical market events.
Source: Khaleej TimesPrevious Next
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