Too much, too soon. That’s Wall Street’s view this week on the strong rebound in crude prices that has happened since late January.
Since Opec decided to pump for all it’s worth, there has been an unusual, even obsessive, degree of interest in US rig-count data and corporate capex plans. A levelling out of US crude stocks and a fall in output at two of the US’ largest producing regions have been interpreted as signals that Opec’s grand plan to rebalance the market — leave it to the US to sort out — is working. With prices up by around 30pc since the year’s trough, producers such as Chesapeake and Occidental Petroleum were confident enough to raise their output guidance for the year.
And this is where the banks have stepped in. With remarkable unanimity Barclays, Societe Generale, Morgan Stanley, BNP Paribas and Goldman Sachs have this week all warned against irrational exuberance. The oil price is, variously, looking past or ignoring implied second-quarter stockbuilds (Societe Generale); highlighting a disconnect between futures and physical markets (Barclays); complacent about rising Opec production and the possible return of Iranian crude (Morgan Stanley); giving too much precedence to demand (BNP Paribas); and setting the stage for a derailment of the rebalancing (Goldman Sachs).
Setting aside Goldman Sachs’ interesting turn of phrase — capsizing the readjustment? Destabilizing the counteraction? — all four banks are essentially saying the same thing. This price rally will eat itself. Output will be encouraged at $65/bl and discouraged at $45/bl — consultancy Petromatrix has named this range the “shale band” — and these two points will feed off each other to supress or encourage production.
This will be music to the ears of Saudi Arabia and its partners in Opec’s plan to shed the burden of ensuring oil market stability.
Just when it looked like Opec would gather in Vienna next month with crude trading at the same price it was at the last time the group met, the cartel can regroup and say its strategy is being vindicated by market-led price discovery. Saudi Arabian oil minister Ali Naimi will be asked, more out of habit than anything else, whether Opec will lower the agreed collective output level that it’s exceeded for 10 months. US producers are still reeling from the last Opec meeting; the group’s long game is just beginning.
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