Have oil prices hit bottom?

Oil prices jumped last Tuesday on news of a deal to freeze production between Saudi Arabia and Russia – but not for long.

782-oil-634

Oil prices jumped last Tuesday on news of a deal to freeze production between Saudi Arabia and Russia, but finished the week pretty much where they started it. That's "probably a fair reflection" of the deal's significance, says Malcolm Graham-Wood on MalcysBlog.com. A freeze on production, while "laudable, ain't going to change the market". There is still a glut, which will look even worse next month when refiners do their usual maintenance ahead of the driving season and thus cut back on buying oil in the market.

Even the agreement not to raise output at record highs in both countries depends on other countries signing up, adds the Financial Times. Heavyweight producer Iran, keen to secure market share as sanctions are eased, hasn't exactly rushed to endorse the deal. "Short of a revolution in Riyadh", says Nick Butler in the same paper, it's hard to see prices going above $50 a barrel for three years.

But is the bearishness in the oil market overdone? An immediate price surge may be off the table, but prices could well have hit bottom. They've held above $30 for a month; the glut increasingly looks to be "priced in"; and the Russia-Saudi deal (the first between a member of oil cartel Opec and a non-member for 15 years) shows producers are willing to explore ways of eventually cutting output.

Meanwhile, drilling activity, and hence future output in America, continues to fall. The number of operational oil rigs has fallen to just over 500 from 2,000 a few years ago, says Liam Halligan in The Sunday Telegraph. With the International Energy Agency expecting supply and demand to rebalance by 2017, prices may begin to tick up as investors look forward to the glut disappearing.

And once they do turn the corner, they could rise faster than everyone expects, says the FT'sJohn Dizard. This is due to the structure of the oil futures market. At present oil producers have heavy debt loads or large populations to keep happy, so they have kept pumping oil despite ample supplies. This has fuelled demand for storage and driven up the price of oil futures compared to spot prices, creating a pattern called "contango".

This in turn has prompted speculators to reinforce the trend and price pattern via an oil "cash-and-carry trade": selling short-dated oil and buying long-dated futures. But once investors think the spot price is set to rise, they will unwind their positions, sending futures prices down and spot prices up just as currency carry trades can quickly unwind and move prices. If oil has hit "peak bear", you may be surprised at how fast it snaps back.

Recommended

What escalating tension between Iran and the US means for oil prices
Global Economy

What escalating tension between Iran and the US means for oil prices

The tension between the US and Iran is unlikely to mean all-out war in the Middle East. But markets may be getting a little too complacent about its e…
6 Jan 2020
Rising output will keep a lid on the oil price
Oil

Rising output will keep a lid on the oil price

Oil exporters’ cartel Opec gave further encouragement to the bulls this month after agreeing to new production curbs.
20 Dec 2019
Brace yourself for pricier oil
Oil

Brace yourself for pricier oil

Global growth, and hence demand for oil, could surprise on the upside next year, leading to a bounce in the oil price.
29 Nov 2019
Why has the oil market taken the Saudi attack so calmly?
Economy

Why has the oil market taken the Saudi attack so calmly?

After an initial spike in the oil price, the market seems to have shrugged off the attack on Saudi Arabia’s oil infrastructure. John Stepek asks if it…
23 Sep 2019

Most Popular

Here’s why you really should own at least some bitcoin
Bitcoin

Here’s why you really should own at least some bitcoin

While bitcoin is having a quiet year – at least in relative terms – its potential to become the default cash system for the internet is undiminished, …
16 Sep 2020
Will a second wave of Covid lead to another stockmarket crash?
Stockmarkets

Will a second wave of Covid lead to another stockmarket crash?

Can we expect to see another lockdown like in March, and what will that mean for your money? John Stepek explains.
18 Sep 2020
James Ferguson: How bad data is driving fear of a second wave of Covid-19
UK Economy

James Ferguson: How bad data is driving fear of a second wave of Covid-19

Merryn and John talk to MoneyWeek regular James Ferguson about the rise in infections in coronavirus and what the data is really telling us.
17 Sep 2020