Sunday, March 1, 2015

Economy: Oil Price - Tug Of War

(Drivebycuriosity) - There is tug of war on the market for oil. While the fundamental data are applying pressure on the price of oil, hedge funds and other speculators are betting on much higher prices.

The oil supply is rising fast, faster than the demand, causing a growing glut of oil (bloomberg). The extending oversupply should lead to a lower oil price. But the fundamental market data are ignored. Since end of January the price of oil has been climbing again and jumped around 30%. The oil rally is driven by speculation that the oil price has already reached the bottom. Many are betting on a v-shaped recovery like in the years 2009/2010 (driveby).

Last Wednesday we got news that the US oil inventories rose to another record high (bespoke bloomberg). This is a clear sign that market is more and more oversupplied. But on Wednesday alone the oil prices jumped 5% (reuters). According to Reuters and other media the buyers got motivated by Saudi Arabia`s oil minister al-Naimi who was musing that the oil demand is rising and that the market might have reached the bottom. The same al-Naimi who talked in December about $20 for oil (business).

                                                            Denial Of Fundamentals

It seems that the majority of oil traders cares more about Arabian noise than the fundamental supply and demand data. This denial of fundamental datas is not new. From 2010 till last summer the price of oil stayed stubbornly above $100 even that the oil glut was already accumulating. The exaggerated oil prices stimulated production and curbed demand. Both trends aggravated continuously the oversupply. Last autumn the situation became finally unsustainable and the oil price collapsed. 

I think if the current rally will continue,  the rising oil prices again will aggravate the oversupply. Producers will pump more oil and consumers will reduce their demand again. This will lead to another collapse of the oil price pressuring Brent Crude deep below $50. This is just a matter of time.

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