Oil prices opened strong on Monday and extended gains by more than a third from this year’s lows in early Asian trade. This is largely due to expectations of a tightened supply that flickered hopes of an easing in the global oil glut.
West Intermediate Texas (WTI) is trading up 1.89% at $36.6 per barrel, while Brent crude is trading at $39.46, up by 1.91%. “It looks at this stage as if it (oil) has formed a little bit of a bottom and perhaps we’re going to see a sustained price in the $30s, maybe trending back up to $40 dollars at some point,” stated Ben Le Brun of OptionsXpress.
In recent weeks, oil prices have been increasing steadily, triggered by hopes of an output freeze. So far, around 4 countries have agreed on freezing output at January levels. These include Russia and Saudi Arabia. However, Iran and Iraq have not agreed on any output cut as of yet.Improving economic outlook has strengthened expectations for a market recovery and has also elevated oil prices. “The macro picture takes all corners of the globe into account, and those corners seem to be improving…and that’s where I’m seeing the oil price tick higher,” added Mr. Le Brun.
According to data compiled by Baker Hughes, US energy firms cut oil rigs for an 11th straight week to the lowest level since December 2009. Last week, drillers removed 8 oil rigs, lowering the rig count to 392.
In addition, US shale production declined from its highest level in April last year. “The tight credit market will make it difficult for U.S shale producers to refinance upcoming debt, and we may see an accelerated decline in U.S oil production in 2016 to 2017,” said ANZ.
The global outlook for oil demand has shown signs of improvement recently. Last month, US jobs growth data rebounded as nonfarm payrolls surged by more than 240,000 and gains in the prior two months were revised up by around 30,000. Growth in jobs could lead to an increase in oil demand, therefore increasing oil prices.
According to analysts, strong US jobs growth data pushed the markets to the north late last week and the upward momentum continued on Monday. However, the shift is now inclining towards Asia, specifically China where National People’s Congress commences its annual session this week.
Recently, Premier of the People’s Republic of China stated that the country’s targeted economic growth should be around 6.5% in the five year period. The country’s top economic planning agency rubbished any claim that the weakening Chinese economy is heavily impacting the global economy.
China is one of the biggest consumers of crude oil and gas. According to SCI International’s energy analyst Gao Jian, China will remain the leading importer of crude oil in the future despite its weakening domestic supply and increasing crude oil demand by local refineries.
ANZ believes that, “short-covering in commodities continues to push prices higher. This week’s slew of economic data releases in China, however, will determine if this rally continues.”
The investment group CLSA expects supply cuts by China’s oil majors by around 5% this year, with further cuts likely to come around next year. On the outlook, Beijing is highly tolerant to “ever increasing crude oil.” Therefore, the firm expects import ratio to be around 70% in the next two years or sooner, according to Nelson Wing, analyst at CLSA.
Apart from a positive outlook for the crude oil market, reduced short positions also indicate that oil prices will climb, which has revived investors’ confidence. Ric Spooner of CMC Markets stated, “there’s a good prospect that Brent could hit $40 … (it) could easily do it in the next trading session.”
However, analysts still maintain that the oil glut could continue. “Upside should be limited by bloated global inventories and producer hedging. Moreover, we worry that this latest oil bounce shares many features of the 2Q15 false oil rally,” stated Morgan Stanley on Monday.