Oil: Smoke And Mirrors

(Drivebycuriosity) - Oil is on a tear these days. In the recent days the price of oil (Brent Crude) jumped on the financial markets from a low of $27 to $35, a plus of about 30%! The rally was driven by rumors that Opec & Russia might strike a deal to cut oil production together to stabilize the price of oil (marketwatch).

The rumors don´t make sense. If Opec & Russia would indeed cooperate and hike the oil price together up to $40 and higher, this would be a rescue mission for the frackers. They would become profitable again and might even increase their oil production. If Opec & Russia together would manage to hike the price of oil significantly this would be just a temporary success. Rising oil prices would just boost the oil production of non-Opec produces again and amplify the global oil glut. Some of the frackers make even profits when the price of oil drops to $22.52 a barrel, writes Bloomberg (bloomberg).

The recent oil price jump reminds of the oil rally in spring 2015. Then the oil price climbed temporarily 50% (from $46 to $68). The rally was driven by speculation that the US oil production would fall sharply and would cause a V-shaped recovery. It turned out that the speculators underestimated the resilience of the US oil production. They also ignored the end of the sanctions against the Iran  that allowed this big Opec producer to come back to the market again.

According to Bloomberg the recent oil rally got fueled by hedge funds that "increased bullish oil bets by the most since 2002" (bloomberg). This also is a reminder of 2015 when spikes in Spring & August got boosted by waves of hedge fund bets. I assume that these speculators still underestimate the efficiency of the US oil production - and the return of the Iran on the oil market. The recent oil rally is just smoke & mirrors.