RIYADH: Oil markets posted their largest monthly gain in almost six years in April. From January’s six-year low, prices went up by almost 50 per cent.

Yet, the rally appears unsustainable, a consensus seems emerging. It indicates a deep disconnect with the physical markets, as tens of millions of West African, Azeri and North Sea barrels were struggling to find buyers.

Fundamentals do not support a sustainable rally. Output is higher than demand. Aided by record or near-record supplies from Iraq and Saudi Arabia, the April Opec oil output jumped to its highest in more than two years.

The Russian oil and gas condensate production is also at a post-Soviet record level of 10.71 million barrels per day in April. And the return of Iranian crude, enough to dampen the market spirits further, could also be just round the corner. And though the US rig count continues to fall, week after week, for the last 21 weeks in a row now, touching the 905 mark on April 24 — from 1,854 during the same period last year — the US output doesn’t seem going down — in the near future. US producers are optimistic.

In its first-quarter results, oil company Devon Energy boosted its expected production increase to 25-35 per cent — up from the previous quarter’s forecast of a hike of 20-25pc only. Noble Energy too made similar moves, and now expects to sell 300,000-315,000 barrels of oil equivalent per day, up from February’s forecasts of 295,000-315,000 for 2015.

“There’s 5,000 wells in the US that have been drilled but uncompleted,” Matt Smith, global energy commodity analyst at Schneider Electric told CNBC’s Squawk Box.

“If those come back to market, as there is the financial incentive (currently) to do so, that could bring hundreds of thousands of barrels back to the market when we’re still in a situation of imbalance.”

There are plenty of headwinds for oil, a Bank of America Merrill Lynch report said. Refineries are going into maintenance in the fall which will decrease demand for oil. The strengthening US dollar will also pressure dollar-priced commodities like oil which become more expensive for holders of other currencies as the greenback appreciates.

Many hence feel, oil markets are not out of woods yet — despite the surge. “We don’t think we’re out of the woods yet when it comes to oil markets improving,” Barclays oil analyst Miswin Mahesh told Worldwide Exchange.

“The rally from this year’s low is impressive, but it contains the seeds of its own destruction in potentially re-stimulating supply and curtailing demand,” Hufton was quoted by WSJ as saying.

Markets are simply awash with crude. “We’ll see weakness come back into crude prices as basically we’re still one and a half million barrels oversupplied on a global basis,” Matt Smith emphasised.

“I think the downward pressure is going to build,” analyst John Kilduff told CNBC, underlining that all the elements that brought oil down to the low-$40s remain in place. Despite oil prices hitting a 2015 high, global demand remains soft and higher prices are transitory, a Bank of America Merrill Lynch analysts said in their report.

“I think as we move into the Sept-Oct contracts, we are going to see some downward pressure again,” said Francisco Blanch, the firm’s head of commodities.

Eugene Graner, of Bismarck-based Heartland Investor Services says that the current run up to $62 a barrel from the $40s was a seasonal rally and won’t spike past $65. He was of the view that the rally may last several months, yet, ultimately the price of oil would sink into the $35 to $40 range in the fall.

“A lot of people are looking for $70 a barrel, and they’re not going to get it,” he was emphatic.

Signals being emitted indicate a bearish market — in the months to come.

Published in Dawn, May 10th, 2015

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