Commodities, Emerging Markets, Energy, Stocks

The Top Reason Oil Has Been Going Up Recently – And Why It’s Only Temporary

Oil

Equity markets are going through a period of “short-covering,” BlackRock senior director Ewen Cameron Watt told CNBC on Tuesday.

According to him:

There was always going to be a bit of a rebound in these sectors [oil and iron ore] because they have been so heavily sold down, (…)

The supply side of oil is going to get tighter this year. The supply side of iron ore will get tighter in the next year and I think we’re just seeing that kind of rebound. (…)

I don’t think we’re about to start a super new cycle. Indeed China is cutting capacity, or trying to cut capacity this year which is again part of the story of stabilization in prices.

The news agency noted that oil prices have jumped up this week, with global benchmark Brent crude breaking above $40 per barrel level.

Watt told CNBC that the oil market rebound is

one of those surges you get in an oversold market.

The price was going to stabilize because it was dropping to the levels where it was unprofitable to produce.

However, Goldman Sachs predicts the commodities rally will falter soon and it’s high time to start shorting them again.

According to Bloomberg:

Any increase in raw material prices will prompt more supplies to enter the market, making it difficult for any advance to be sustained, analysts including Jeffrey Currie wrote in a report dated March 7. The bank maintained its bearish outlook for gold, said iron ore’s surge would prove temporary and reiterated that oil will fluctuate between $20 and $40 a barrel. Goldman also said it was a good time to make bets that copper and aluminum would decline.

Goldman Sachs believe that current oil market is still oversupplied and prices have to remain lower.

Only a real physical deficit can create a sustainable rally which is still months away should the behavioral shifts created by the low prices in January and February remain in place.

So how low can oil prices go? Gary Shilling, a US consultant, last year suggested

prices could drop as low as $10 per barrel!

So far Gary’s projection goes in the right direction and the $10 level is not only his view. Standard Chartered became the latest major bank to downgrade its oil outlook to $10 last month, joining the likes of Goldman Sachs, RBS and Morgan Stanley in making ultra-bearish calls.

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