Why Should Oil Bulls be Cautious?

Why Should Oil Bulls be Cautious?

17 May 2016, 11:35
Roberto Jacobs

Why Should Oil Bulls be Cautious?

Production drop in United States to 8.8 million barrels/day, close to 1.8 million per day production drop in Canada due to wildfire and outages in countries like Libya, Nigeria is fuelling the rise in oil prices. WTI is currently trading at $48.1/barrel, which is the highest level since October last year.

One of the top oil bear, Goldman Sachs has also revised its outlook on the upside, from famous $20/barrel call. According to the bank, Oil supply/demand have adjusted much faster than expected and market has moved to a deficit from very large surplus. Developed markets’ energy watchdog, International Energy Agency (IEA) has also issued similar statements.

However, we believe, oil bulls should not be too complacent and lower for longer is still the best case scenario. Here’s why –

  • Production drop in Canada and outages in countries like Libya, Nigeria likely to be short lived, except for Venezuela, which is suffering severe economic trouble. Once these outages are over, supplies will once again rule the fundamentals.
  • Global energy supplies are at multi-decade highs, which should prevent any major oil shocks and keep check on prices.
  • High cost shale producers are excellent swing players and can increase supplies within weeks and that should keep a check on prices.
  • Moreover, other nations are likely to foray into shale space, which would put additional pressures on oil.
  • Dollar rally has hit hurdle but it’s not over, neither is FED reserve’s rate hikes.

However, current push may extend further and to as high as $70/barrel area but beyond that may not happen for years.

WTI is currently trading at $48.1/barrel and Brent at 80 cents premium.

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