Oil price extends overnight gains but excess supply lingers
Oil prices have extended a strong rebound in overseas markets on the back of investors’ covering of short positions, although oversupply worries remain.
The West Texas Intermediate (WTI) crude oil benchmark traded in Asia was up at 17 cents at US$29.7 a barrel this morning, 13.4 per cent higher than the 12-year low of US$26.19 seen earlier this week. The Brent international benchmark was also up 24 cents at US$29.49.
“Oil prices jumped 6.5 per cent overnight, finally displaying the sort of price action that may trigger a reduction in record speculative short positions,” Citi’s analysts Friday said in a note, adding the cumulative rebound from the low on Thursday amounts to almost 10 per cent.
“With the European Central Bank (ECB) delivering a more dovish than expected message and firing up expectations for more easing at the March meeting, and with reports yesterday that the Bank of Japan may be closer than assumed to easing further, this move up in oil prices has helped further reel in investor sentiment form the brink of panic.”
ECB president Mario Draghi hinted strongly the bank may ease monetary policy again amid softening inflation due to sharply lower commodities prices.
Still, analysts said the fundamental reason of oversupply behind the slump in oil will linger for much of the year given Iran will be ramping up output after the United Nations lifted economic sanctions on it, increasing oversupply.
The United States’ Energy Information Administration overnight said US crude oil stockpiles climbed almost four million barrels, higher than analysts’ expectation of 2.8 million barrels.
Analysts differ on future supply.
American brokerage Sanford Bernstein’s analysts have forecast that the fall in output by producers outside of the US and the Organisation of the Petroleum Exporting Countries(OPEC) will be quicker than many people expect, resulting in a restoration of demand-supply balance of the oil market in the year’s second half.
They believe the market’s consensus projection of a one per cent fall in non-OPEC output this year is too conservative and are expecting a three per cent drop in China’s supply, against the consensus view of 0.7 per cent.
Dominant offshore producer CNOOC on Tuesday announced an oil and gas output target two to five per cent lower than last year’s estimated realised output. Its onshore state-backed peers, PetroChina and China Petroleum & Chemical (Sinopec), which have higher break-even costs than CNOOC, are also expected to cut output this year amid loss-making crude oil prices.
Others, however, say global production curtailment has been too slow.
“Over 70 per cent of global oil production capacity is currently running at a loss, and still the producers have not taken any meaningful steps to limit supply, it became clear the so-called [price] ‘floor’ will be established by traditional free-market forces,” said global commodities broker Marex Spectron in a note.