by Sam Fletcher, Senior Writer
May was “a rather odd month” for the oil market with “some unusually sharp swings in prices and sentiment” despite no dramatic change in market fundamentals, said Paul Horsnell, managing director and head of commodities research at Barclays Capital.
“A certain degree of market fickleness, capriciousness, and even schizophrenia has been seen in a series of changes in short-term perceptions, all primarily based on long-term arguments,” Horsnell said. “Looked at through the prism of movements in the price of the back end of exchange-traded curves, for example West Texas Intermediate for December 2019 delivery, recent dynamics certainly show a high of degree of volatility. However, they do not seem to show any convincing break, nor do they support views of changes in the long cycle of the upward pricing of oil and other commodities.”
The back of the WTI curve started this year close to $94/bbl but soon rallied to hold above $100/bbl through February, March, and April. “At the end of April it rallied further to a high for the year of over $107/bbl before [May’s] sharp swings first took it all the way back close to $96/bbl before recovering to the latest settlement price of $102.87/bbl,” he said May 26.
Horsnell reported the price of crude was then $4.56/bbl below the high for the year, $6.39/bbl above the settlement low reached earlier in May, $8.56/bbl above the low for the year, and $1.11/bbl above the average for the year to date. “Put in those terms, price behavior does not, in our view, appear to provide the slightest support for the idea of a structural break downwards or a change in the long-cycle dynamic. There has, in our view, been much ado about nothing,” he said.
Geopolitical upheavals
“There is perhaps still something a little startling about a long-term price that is above $100/bbl. It is, however, possibly becoming a little less startling concept for the market as a whole, a change that has been helped along the way by the geopolitical upheavals seen this year,” said Horsnell.
After each upheaval, there has been a reappraisal by several key producers of the level of nondiscretionary government spending that must be maintained in those countries. “That reappraisal has been so significant that at $100/bbl there is now little or no rent left for several of the most important oil producers,” Horsnell said. “Suddenly $100/bbl starts to look like ‘the new normal,’ because too long a period below that level might run the risk of generating mounting political uncertainty in key areas.”
This year now looks likely “to be a year in which demand does not slow as much as is necessary, in which supply [outside the Organization of Petroleum Exporting Countries] starts to flat-line again, and in which political pressures support and increase the reserve long run price of oil,” he said. “However, the market has instead been through a sharp swing in a single month based first on the perception of a negative break in the long-run dynamic, and then something of a reversion in that view. What that fickleness has perhaps missed is that the combination of supply and demand dynamics plus the implications of the geopolitical dynamics are all currently arguing for a higher market-clearing long-run price, in our view.”
Any risks of diminished demand among countries of the Organization for Economic Cooperation and Development (OECD) appear to be balanced by chances of increased Chinese demand due to power rationing. Within the OECD, Japanese demand is now expected to be stronger than initially expected after the earthquake.
“In our view, the market is currently tighter than is generally perceived, with the only very partial replacement of Libyan volumes resulting in the absence of a seasonal stock build in what should have been the easiest quarter this year to rebuild inventory buffers,” Horsnell said. Without that rebuilding, the market is expected to be “relatively tight” in the second half of this year.
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