Oil price posts two-year highs - but how long can it last?

Oil price rallies despite more bearish supply data

10 November

International oil prices followed a wider rebound for risk assets yesterday, despite another round of data highlighting the global supply glut.

After Donald Trump's shock election win on Tuesday, Brent crude, which sets the oil price in the North Sea, fell to a three-month low of $44.40 a barrel in early morning Asian trading.

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But as traders digested the news – and a "presidential" acceptance speech by "The Donald" calmed nerves after his anti-free trade campaign rhetoric – the initial slump ended and Brent bounced back.

It reached a high of around $46.75 a barrel earlier this morning, up five per cent from its floor around 24 hours earlier.

US counterpart West Texas Intermediate (WTI) followed a similar trend, falling to a session low of $43 a barrel on Wednesday morning before hitting a high of around $45.50 today, a trough-to-peak wing of close to six per cent.

In buying into the recovery, traders "looked past" a report from the Energy Information Administration, the US energy watchdog, showing a 2.4 million barrel build in US crude oil reserves last week, says Reuters.

That was the third week in a row of builds, following an all-time high increase in stockpiles a few weeks ago, triggering a big drop in the oil price as it emphasised the oversupply of oil that persists around the world.

"The report is fairly neutral and the market is accordingly having a muted response," said Matt Smith, the director of commodity research at energy data provider ClipperData.

However, in a separate report, Reuters says the data has "dampened" enthusiasm for the oil rally and Brent and WTI were off their highs at $46.49 and $45.12 by around 9.30am in London today.

Ultimately, the market is trapped in a narrow range some way below October's year-highs ahead of an Opec meeting later this month that traders hope will confirm a production cut of up to one million barrels a day.

If that deal falls through, as many expect, the oil price may fall much lower, with some predictions of it moving back towards its low in February of below $30 a barrel.

Will the oil price fall to $43 a barrel today?

9 November

Brent crude is expected to slump today after Donald Trump's victory in the US presidential elections.

From the $46-a-barrel level it was holding yesterday, the global benchmark was predicted by analysts at JP Morgan to fall as low as $43 today if the Republican triumphed, reports the Wall Street Journal.

Trump's campaign rhetoric was fervently anti-globalisation and anti-free trade, leading analysts to expect that a victory for him "would hit riskier investments, from equities to corporate bonds and oil".

These predictions seemed to be coming true in early trading. As the Japanese Nikkei tanked towards a five per cent loss in the overnight session in Asia, Brent crude dropped to $44.40 a barrel – its lowest level since August.

"This is deja vu of the Brexit moment, very worrying," Bob Takai, the president at Sumitomo Corp Global Research in Tokyo, told Reuters.

But there has already been something of a recovery. After close to two hours of trading in London Brent crude had pared its losses for the day to 0.3 per cent, hitting $45.90 a barrel. US counterpart West Texas Intermediate was down 0.5 per cent to $44.74.

Markets were soothed by the president-elect's victory speech, which showed unexpected contrition and helped ease fears he would pursue the divisive agenda suggested by his bellicose campaign rhetoric.

Equity markets in Europe have bounced back after posting their biggest opening losses since the day after the EU referendum, with the FTSE 100 down just 0.2 per cent and above its Friday close.

It's not all about the election, though, and fundamentals look weak for oil, Tamas Varga, an oil analyst at brokerage PVM, told the WSJ.

American Petroleum Association data revealed a gain of 4.4 million barrels last week, the third week of increases in a row and adding to an all-time high rise in stocks two weeks ago.

Official estimates from the US energy regulator will come later today and, if they confirm a similar rise, oil could fall sharply again.

Will the oil price return to $26 if Opec deal fails?

8 November

Brent crude remains largely unchanged at near its recent three-month low today, although the international oil price benchmark has rebounded a little yesterday afternoon's level.

That mini-rally from a low of below $45.50 overnight to a little above $46 a barrel this morning was driven by renewed confidence that Hillary Clinton will emerge victorious from the US presidential election today.

Brent's US peer, West Texas Intermediate, rose 1.9 per cent yesterday from a little above $44 a barrel, but remains below the important $45 threshold.

Markets fear the economic consequences if Republican Donald Trump wins today's election, but final polls and early voting indications giving Clinton the edge are so far calming nerves.

However, both oil price benchmarks are well down on their 2016 highs of last month, when Brent touched $54, and analysts doubt the election result will provide much in the way of support even if it is in line with the markets' wishes.

David Thompson, the executive vice president at Powerhouse, an energy-specialized commodities broker in Washington, told Reuters he was "not so sure" of a rally in the event of a Clinton victory.

It wasn't the Democrat's policies driving the positive sentiment, he added, but "fear of the unknown" in the case of a Trump win.

Instead the market will turn back to fundamentals on supply – and they're not good. After a record build in US reserves last week, analysts expect another 1.1 million barrel increase to be reported this week.

Bullish investors are hanging their hopes on an Opec supply deal agreed in September, which should be finalised this month.

However, a number of the bloc's 14 members, including Iran, Iraq, Nigeria and Libya, have demanded to be exempt from cuts, while Saudi Arabia has threatened to increase its already-record production level if the deal breaks down.

If this happens, there will be little to support the oil price, which could fall into the mid-$30s, oil market commentator John Kilduff told CNBC.

He added that the February low of $26 would also be "back in-play, into year-end".

On the other hand, if the deal succeeds, most expect oil to surge back above $50 a barrel quickly.

Oil price rebounds after worst trading week in 11 months

7 November

Oil bounced back this morning following its ravaging last week, when prices fell 15 per cent, marking the commodity's worst five-day trading performance since January.

Brent crude, the global oil price benchmark, fell to its lowest level since early August, hitting a shade above $45 a barrel at one point on Friday.

However, it started rising into the close in New York and in the first Asian trading session of this week and was 1.6 per cent higher in London this morning, at $46.29.

US counterpart West Texas Intermediate fell to a nadir of $43.57 a barrel on Friday, its lowest since 20 September. It had rebounded to $44.88 this morning in London.

Both benchmarks remain low in comparison to their recent trends, with Brent having hit a 2016 high of close to $54 a barrel in mid-October.

Traders suggest the move upwards since Friday does not mark a meaningful shift in sentiment and is merely a relief rally driven by "opportunistic buying" after the steep falls, says Reuters.

Also helping the market is a statement from the Opec executive reaffirming its commitment to agreeing a production cut of up to one million barrels of oil a day later this month.

Secretary general Mohammed Barkindo said: "We remain committed to the Algiers accord… we remain committed to the implementation."

Analysts are not convinced, however. Barclays told Reuters there remains "little to no agreement among [Opec] producers about who would cut how much".

It added: "None of the non-Opec members consulted thus far has expressed any intention of a cut."

There is also the existing supply glut, which was emphasised by the largest reserves increase on record in the US last week. Production in the US also rose marginally to its highest since January, according to official data.

Oil price still falling after more bearish supply data

07 November

The oil price dropped sharply again on Thursday, revisiting lows not seen for more than a month.

Global benchmark Brent crude fell more than one per cent and at one point dipped below $46 a barrel, while its US counterpart, West Texas Intermediate, sunk 1.5 per cent to settle at $44.66, its weakest close in five weeks.

Both are back below their levels of 28 September, the day the 14-nation Opec cartel announced a shock supply cut that sent oil on a prolonged rally. Brent reached a 2016 high of $54 a barrel in mid-October.

Sentiment has turned since a spate of bearish data on oil reserves in the US, which is fuelling fears that we have not seen the end of a global supply glut that has persisted for more than two years.

This week, private sector data suggesting that US crude stockpiles had grown by nine million barrels in seven days was followed by a more comprehensive official report, described as the "most bearish report of all time", putting the figure at a record 14 million barrels.

Yesterday, new figures revealed oil reserves at the main US delivery hub in Cushing, Oklahoma, grew by 1.2 million barrels last week, says Reuters.

What is needed to turn sentiment round is some renewed optimism on that Opec deal, which would see up to one million barrels a day cut from production.

But despite the bloc publishing a long-term strategy paper signalling a return to intervention to manage global supply, such optimism is in short supply.

This week also saw the news that Opec production, along with that of several of its individual members, hit a new record in October. Russia, which does not belong to the cartel but was hoped to join the cuts, meanwhile pushed its output to a new post-Soviet high.

Add in the fact that a number of Opec states are demanding exemptions from any cuts and you have a recipe for discord that could prevent the agreement being finalised later this month.

"Since things have clearly bogged down into negotiations about old-fashioned quotas - precisely what Opec had wisely shied away from for more than a decade - ministers now face a very tall mountain," Credit Suisse analysts said in a note.