Oil’s short-term pain for long-term gain
Energy analysts have many perspectives on where the price of oil will be in the days ahead, but analysts representing large investment banks and money managers, in particular, tend to be more impactful with their insights given the weight of the financial positions they hold in the paper markets.
After a few weeks that have seen oil’s value decline about $5 a barrel for both WTI (West Texas Intermediate) and Brent oil, a resurgence in U.S hydraulic drilling and Wednesday’s record U.S. petroleum build to over 530 million barrels, some are now advancing the notion that the crude market is indeed balancing. Supported by the notion that OPEC and non-OPEC oil producing countries are openly suggesting that their six -month crude output cap will be extended come June, the big hitters in the markets are beginning to set aside fundamentals and conventional economics.
On Tuesday, Barclays Bank’s head of energy commodities, Michael Cohen, stated that the recent decline in oil’s valuation was a “short-term blip” related to pessimism over squabbling within OPEC’s ranks and the traditional weakness in its value at this time of year given refinery maintenance and turnaround. However, within “the next few weeks” as refineries ramp up, “crude demands should start to pick up,” he said. Indeed, Barclays takes the view that unlike last year when oil stocks vastly exceeded demand, this year appears to be “basically balanced,” even with the upsurge in U.S. shale oil output.
Joining the chorus of enthusiasm for oil’s recovery is Mark Yusko of Morgan Creek Capital Management who contends that while oil could drift down towards $40 a barrel, it is likely to rebound to $60 by year’s end. “I think it will be pretty flattish during the summer, and then we’ll get that last December rally into year-end like we got last year, and probably finish in the high $50’s, maybe hit $60” he noted. Yusko’s take is noteworthy given he was the one who predicted oil’s collapse to the mid $20’s back in January 2016.
Still, the majority opinion seems to center almost exclusively on whether OPEC’s cuts will draw down the crude glut overhang and whether the agreement can be extended. Without these conditions, pessimistically, the consensus is for oil declining to the $30’s.
For end users like motorists, oil’s fate only partially impacts pump prices. As seen in both Canada and the U.S., prices have more to do with market factors surrounding refinery output and consumer demand than the crude needed to distill our fuels.
A future most uncertain at this juncture.