is back at $60 for the first time in more than two years, but the big question
is: Can crude hold onto its gains?
prices firmed up in recent weeks, but held back from key resistance
points—roughly $60 per barrel for Brent, and around $55 per barrel for WTI. Oil
traders were reluctant to test the upper limits of the “shale
band” at $60, a threshold that has repeatedly forced traders to liquidate
their bullish bets or get burned. Top analysts argue that it would take
something really significant to allow oil to break above $60.
remains to be seen if we are at that moment. But Brent moved up above $60 on
Friday and held onto the gains during midday trading on Monday, a tentative
sign that the oil market might be flirting with a new, higher range.
proximate cause for the suddenly higher price is a series of comments from top
OPEC and Russian officials last week, pointing to cohesion around another
extension of the production cuts. Saudi crown prince Mohammed bin Salman said
that “of course” he wanted to extend the cuts. Russian President Vladimir Putin
suggested an extension through the end of 2018 a few weeks ago, leading
everyone to think an extension is essentially a done deal.
top of that, hedge funds and other money managers stepped up their bullish bets
ahead of those comments, granting more leeway for oil futures to push higher.
Bullish positioning rose by 2.6 percent in the week ending on October 24. “We
have evidence that people are positioned long into OPEC in November; the
consensus trade on the street is that they’ll extend cuts,” Chris Kettenmann,
chief energy strategist at Macro Risk Advisors LLC, told Bloomberg. With an
OPEC deal in November highly likely, “it makes it very hard to be aggressively
short,” Kettenmann added.
reason that this time might be different is that the Brent futures curve is in
a state of backwardation, meaning front-month contracts are trading at premium
to oil futures dated further out. That tends to be a sign of a tighter market,
and it also makes storage uneconomical since a trader would be paying for
storage and then selling their product at a lower price in the future.
Backwardation presages sharper drawdowns in inventories, suggesting that there
is more tightening on the way. WTI has lagged behind Brent, but even the U.S. benchmark
is moving toward
another way of saying that the actual fundamentals are improving—unlike other
mini price rallies over the past three years. Inventories continue to decline
and are tighter than at any point in years. OPEC seems determined to keep the
current dynamic locked in for another year or so, and the fact that they’re
telegraphing that resolve ahead of time might actually be enough to change
one unknown is if U.S. shale will respond, as it has in the past, with a quick
spurt of new supply. After last year’s OPEC agreement, oil prices shot from the
$40s to the $50s, and the rig count exploded. U.S. shale production surged from
a recent low in mid-2016 at 8.5 million barrels per day (mb/d), rising up to
9.5 mb/d more recently (at least according to the weekly totals).
U.S. shale add a lot more supply if oil holds at $60? Some analysts think so.
“My concern is what happens now that we’re getting to these price-highs where
we’ve typically seen a supply response,” Rob Haworth, at U.S. Bank Wealth
Management in Seattle, said in a Bloomberg interview. “Fundamentally, you
should see a supply response and that’s going to make it tougher for these
bulls to hang in there.”
there are a lot of cracks
in the U.S. shale complex that have been exposed over the past year. The
Permian basin, which boasts some of the lowest production costs out of all U.S.
shale basins, has seen an uptick in costs, a bottleneck of labor and services,
and even some production problems. More recently, the rig count has started to
decline as companies realize that their growth plans are often capital
destructive. Shareholders in U.S. E&Ps are demanding change, pushing for shifts
compensation and an end to a growth-at-all costs mentality.
other words, U.S. shale might not add another tidal wave of new supply even if
oil prices rise further, and shale output could undershoot a lot of the growth
scenarios. Because those forecasts are some of the most influential bearish
forces on oil prices, holding back benchmark prices from rising, the fact that
U.S. shale might disappoint means there’s actually more room on the upside for