Commodities, Emerging Markets, Energy, Stocks

Credit Suisse: Oil Producers Are Not Buying Into This Rally

Crude Oil

In a note today, Credit Suisse explains that the shrinking spread between spot Brent crude and further-out delivery dates isn’t a bullish sign,” Seeking Alpha reports.

Since January, the spread between spot Brent prices and 2020 Brent prices has dropped nearly $8.00 to $10.71 per barrel, indicating selling in 2017, 2018, and 2019 futures contracts. According to Reuters, the majority of selling has come from E&Ps looking to lock in prices to hedge against a repeat of last year’s second half commodity price route. At the same time, the hedges indicate a lack of confidence that the current commodity rally will continue.

According to Reuters,

Producers have been locking in recent gains across the crude futures price structure, selling forward contracts and potentially undermining further recovery because they do not trust a jump in front-month oil since January.

According to one crude futures trader:

Brent’s flattening contango since January comes as many producers want to cash in immediately on recent price rises. They’ve been heavily selling 2017/2018 and beyond, and it shows that they don’t quite trust the higher spot prices yet, (…)

This means that even the producers don’t really expecting a strong price rally until well into 2017 or later.

According to recently released Goldman Sachs report:

Storage constraints and a still large oversupply in coming months will continue to keep prices in a trendless and volatile range.

The report expects oil to trade at $25 to $45 per barrel in the second quarter of this year, compared with $20 to $40 barrels in the first. It trimmed its 2017 WTI crude price forecast to $57 a barrel from $60.

The Goldman report also states that oil prices could fall sharply in coming weeks while record US inventories offset production declines in the country.

We do not expect growth from OPEC and Russia after the second quarter and expect resilient demand growth.  Our confidence that oil reserves will fall in 2016 if prices remain low, is rising,

Goldman analysts said.

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

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 jumped up last week, with global benchmark Brent crude breaking above $40 per barrel level.

And what is your view on oil prices? Have your say in our poll and feel free to share your comments below.


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