Oil traders are getting excited as crude oil prices rebounded off a low of $47 to $53.76 on several events.
For one, there are hopes for a potential extension of the OPEC and non-OPEC production deal, which could offset rebounding U.S. production. In fact, Russia just announced it’s weighing an extension.
Two, Libya’s Sharara field just halted output a week after reopening, as the National Oil Corporation declared force majeure on exports.
Three, we’re just months away from summer driving season in the U.S., which could boost demand and support higher oil prices.
And four, there’s a great deal of concern about potential attacks in Syria. The knee-jerk reaction to any escalation in the Middle East is always higher oil prices on fears of supply disruption. The last thing we need to see is one of the “choke points,” like the Strait of Hormuz jeopardized.
So, of course, the price of oil has risen. But can it last?
We don’t think it will, especially as OPEC reported that global oil inventories increased at a rate of 430,000 barrels a day in the latest quarter. That means we’re awash in oil. The group also sees supply running well ahead of demand.
Not only that, but the U.S. Energy Department just reported that crude stockpiles recorded an unexpected build to reach a new all-time high. At the same time, gasoline and distillate product inventories fell by smaller than expected amounts.
Then we have news that supplies at the Cushing, Oklahoma oil storage hub – the largest crude oil storage hub in the U.S. -- jumped. In fact, for the week ending April 7, 2017, the Energy Information Administration (EIA) reported that inventories rose by 0.3 million barrels to 69.4 million – its highest point ever.
All as U.S. oil production begins to undermine OPEC’s surprisingly higher levels of compliance with the production cut agreement inked last year.
The concern now is that once the global tensions begin to cool and Libya resumes production, we could see further downside in the price of oil.
In fact, the International Energy Agency (IEA) just noted that it expects production to continue growing with the main impetus from the U.S., where output reached 9.0 million barrels a day in March from 8.6 million in September 2016.
At the same time, the IEA is pointing to data that shows weaker than expected growth in demand in a number of countries, including Russia, India, several Middle Eastern countries, Korea and the U.S, where demand for oil has been stalling.
While many analysts believe oil could trek higher, we think this rebound won’t last, and oil will start trending lower, perhaps back to the mid-40s. With this in mind, we will search for quality, bargain-priced oil stocks when oil backs off. Stay tuned.