The price of oil has rallied strongly in the past few weeks, and is now more than 20% up from its recent lows, which means from a technical point of view it is once more in a bull market. The move has been driven in the main by the announcement last Monday by OPEC that it would meet informally at the International Energy Forum meeting in Algeria next month.
As Joshua Mahony, market analyst at IG put it in a note out on Friday: “Essentially the announcement of a meeting in September has seen Brent turn from a bear market to a bull market in 16 days. The Saudi’s have been talking up the prospects of a deal, and now need to deliver on that or we could see a rapid retreat in the oil price.”
What the recent price moves, highlight, however, is that fundamentals seem to have little bearing on price.
In its latest weekly Oil Drivers note, Societe Generale writes that the Saudi Energy Minister’s comments that it was open to cooperation with OPEC, following the cartel’s announcement, were “similar in tone and content to al-Falih’s comments after the last OPEC meeting in June.
“Venezuela and other may push for a freeze again, and with Iran at or near its short-term capacity, it is not out of the question. However, similar to April, a freeze would only be a boost to market sentiment. Russia, Iraq, and Iran are maxed out or close to it, and Saudi output will go down anyway after the summer peak. So a freeze would not have any impact on actual crude supply.”
There is also seasonality to consider. As Societe Generale points out, while US stock piles fell unexpectedly in the past week (which also helped push up prices somewhat) stocks remain above five year highs. And, on the demand side, US crude and product demand is “about to weaken seasonally”.
Overall, it added, from a fundamental point of view, the market remains marginally in bear territory, as seasonal declines in demand are approaching fast and refining margins remain mediocre.
Thus, while the crude has returned to bull territory it is liable to still be fairly skittish and could turn tail pretty quickly.
