Kristian Rouz – After the US dollar slipped following the Federal Reserve’s fairly dovish meeting minutes published on Wednesday, global oil prices extended gains, supported by declines in US inventories and anticipations of higher demand for fuel.
However, the unenthusiastic investor perception of 'commodity currencies', namely, the Brazilian real and the Australian dollar, suggests the overall raw materials market is still under pressure and oversupply concerns might still linger.
Benchmark Brent crude rose by $1.08/bbl to $56.92/bbl on Thursday, while US oil advanced to $54.64/bbl, with the price gap narrowing between the European and North American markets as the US turns to increased protectionism in foreign trade.
"Confirmation of the bullish set of inventory data from the EIA this afternoon will send prices to the upper end of the current trading range," Tamas Varga of London-based PVM Oil Associates said. "If, however, the figures disappoint those who have gone long overnight and this morning, they will likely run for the exit."
Still, according to estimates by BP analysts, oil prices have only limited room to further extend gains, with a price of $100/bbl being rather unlikely. The abundance of oil still dominates the market, and the recent output cuts are only superficial and temporary, meaning global supply-side capacity is still overwhelmingly greater than that of the demand-side.
Technically speaking, BP analysts say, the global supply might reach about 2.5 trln barrels, while cumulative demand would still stand at 0.7 trln bbl in 2015-2035, subsequently increasing to 1.2 trln bbl over the long run, up to 2050.
“It seems to me increasingly likely that some barrels of technically recoverable oil will never be extracted, there’s just so much oil. Why does that matter? This matters because it could profoundly change the nature of oil markets,” Spencer Dale of BP Plc said.
Bank of America, meanwhile, said the average Brent oil price would fluctuate within the $50-70/bbl range until 2022, having downgraded their estimates from the previous $55-75/bbl expected range.
“Below this level, oil supply rationing and rapid EM (emerging market) demand growth should push prices higher. Above it, we see a surge in global oil supplies and EM demand destruction curbing any additional price gains,” BofA's global commodity research unit said. “In fact, just as spot oil prices rose in recent months, partly due to OPEC cuts, long-dated oil prices have been falling steadily. The drop, in our view, has partly been driven by a dramatic productivity revolution in shale oil economics.“
Given the steady global oil supply, the only variable in the oil price equation is the pace of economic growth in the world’s leading economies. Should the advanced economies gain momentum amidst Trumponomics in the US, post-Brexit readjustment in the UK and the Eurozone, and disinflation-ridden Japan, oil price will increase, pushing emerging market currencies higher and spurring global investment across-the-board.
However, such a price-increase cycle will go bust as soon as oil producers relax their price caps, on the one hand, and US shale production recovers from the devastating disinvestment, on the other.