Oil has bubbled up again over the past few days. US futures have broken out of their recent $70- to $80-a-barrel range, climbing to a three-month high around $82 this week.
The recent recovery in risk appetite, along with the decline in the dollar (which bolsters dollar-priced raw materials) has tempted more investors into the market. The number of speculators betting on further price rises is at its highest since May. Yet the fundamentals "have not improved", says Christophe Barret of Credit Agricole. Indeed, they suggest oil is overpriced and due a correction.
The oil market is amply supplied. American crude inventories recorded their biggest weekly increase in almost two years in the week to 23 July, as imports hit their highest level in four years. They're also at record highs on a seasonally adjusted basis, says Harry Colvin of Longview Economics. Opec's spare capacity has been back at 2002 levels of around six million barrels per day for over a year now. Countries' compliance with their agreed quotas has been slipping, says Dian Chu on Seekingalpha.com.
Start your trial of MoneyWeek today
Get unparalleled financial insight, analysis and expert opinion you can profit from.
Start your trial
Sign up for MoneyWeek’s free twice-daily newsletter.
Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.
Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.
In short, there is a global "supply glut", says Colvin, and it could well get bigger. Note that minor oil producers have been rapidly raising production; in Brazil and Angola, for instance, it is at record levels.
Latest Videos FromMoneyWeek
What's more, Iraq is "looking increasingly well placed to raise production capacity dramatically". The impact of political infighting has been "muted". A programme to auction off oil fields to international companies has accelerated in recent months. If the firms meet their own production targets, output could rise eightfold by 2017.
On the demand side, emerging economies don't dominate the oil market in the way that they do with other raw materials, adds Colvin. Sliding demand in Japan and Europe has offset almost 80% of the growth in demand from the Bric economies since 2005. The pattern has persisted even during the weak recovery.
So a lacklustre recovery, or a renewed slowdown in the West, would continue to hamper the world's appetite for oil. All this adds up to "a downward risk for prices", says Tim Evans of Citi Futures Perspective. Deutsche Bank reckons that, in the fourth quarter of this year, the oil price will average just $65 a barrel.
