Oil prices enter tricky phase

Oil’s journey towards rebalancing continues as latest US crude inventory data showed sharp decline in stockpile. Brent crude continued its march towards $50/bbl for the first time in seven months. The latest released US data show the inventories fell by 5.1 million barrels last week, more than double the market estimate.
The rally had gained momentum earlier this month after various outages, primarily in Canada and Nigeria. The likes of Citi and Goldman Sachs have revised their oil forecasts upwards, following supply disruptions. Recall that Goldman Sachs is believed to be most bearish of all – and it now calls for oil at $60 a barrel by 2017.
“We are definitely moving out of this surplus situation that we’ve been living in since mid-2014. There will still be some time, maybe six months of surplus, but then we’re basically into rebalancing,” Reuters quoted SEB head commodities strategist. That said some corners still have doubts over sustainability of supply side pressures – calling it temporary and lacking the muscle to challenge the glut.
Iran, meanwhile, has continued pumping crude to reach the promised pre-sanction levels. The country is in no mood to curtail production or be part of nay production freeze plan. After the disastrous meeting in Doha last month, market watchers have not pinned high hopes of the upcoming Opec meeting in June. Mind you, Saudi Arabia has shown no signs of altering its strategy of sticking to record high production. If anything, the new oil minister is believed to have a sterner view on oil production.
The volatility aspect is the new normal in the oil world and Citi seems to acknowledge the fact. Some believe that leaving the rebalancing act to market forces without a freeze cut would take longer than expected, for the market to get out of the glut.
Then there is a small matter of Chinese demand, which is surely picking up – but the refineries face a possibility of import curb. Should this happen, the rebalancing would take longer and the equilibrium threshold may also be revised downwards from $60/bbl in 2017 to $55/bbl. Opec’s upcoming meeting could be crucial in terms of market sentiments – despite the likely outcome already known.