Oil Price Retreat Likely Temporary, But OPEC Weighing Its Options

Oil Price Retreat Likely Temporary, But OPEC Weighing Its Options
Recent volatility in oil price based on technical issues, questionable announcements and is ultimately, no reason to panic, analysts say.

Coming off a turbulent week in which oil prices dropped below $40 per barrel for the first time since April, the Organization of the Petroleum Exporting Countries (OPEC) has declared a sideline meeting in Algeria next month.

The price decline prompted some collective hand-wringing of bears around the world. To be sure, energy stocks have underperformed and oil prices have pulled back more than 20 percent from their 2016 highs, analysts at Raymond James and Associates wrote Aug. 8 in a note to investors. Consequently, a full “oil price panic” may be setting in, the analysts said.

But the cause for panic is likely overstated.

“In a nutshell, we believe that this is a very ‘normal’ technical price correction that is being validated and reinforced by pundits focusing only on high gasoline and product inventories. We think this correction could last days or months, but not quarters,” they said. “For those investors focusing beyond the next month or two, the underlying global oil supply/demand situation remains in the very early stages of an extraordinarily bullish secular up-swing that should last years, not months, in our view.”

That’s the same direction OPEC appears to be heading. In an Aug. 8 statement, the cartel said higher oil demand is expected in the third and fourth quarters. Newly installed OPEC President and minister of energy and industry for Qatar HE Dr. Mohammed Bin Saleh Al-Sada said the recent decline in prices is temporary.

“These are more of an outcome resulting from weaker refinery margins, inventory overhang – particularly of product stocks, timing of Brexit and its impact on the financial futures markets, including that of oil,” he said.

Increased crude oil demand in the third and fourth quarters, augmented by winter in the Northern Hemisphere, and a decrease in supply suggests prices will bounce in the second half of the year, he said.

Still, OPEC has scheduled a meeting Sept. 26 through Sept. 28 in Algeria during the 15th International Energy Forum ostensibly to reconsider a production freeze.

When oil prices dropped below $40 per barrel, analysts at Raymond James were quick to say it wouldn’t be a lasting indication of price. Rather, the decline was based somewhat on technical reasons and at least partially as a response to Libya’s announcement it will add 150,000 barrels per day in exports by the middle of August – about which analysts were dubious.

The technical issues included “a high oil spec short position early in the year that morphed into a short covering and a massive oil price rally from March through June. Once the short covering had run its course, oil prices ran out of momentum and eventually rolled over,” Raymond James analyst Luana Siegfied told Rigzone. “With the roll-over, shorts began to press new bets and the longs took profits creating a typical cyclical correction in – what we believe – is a secular uptrend.  Our technicians believe this is a relatively typical cyclical correction where oil prices are likely to re-trace to the $35-$40 price level before starting another run upward.”

As a result, RayJa expects the drop is most likely a one-off event, but technical trends can be a challenge to predict long term.

“The most important message here is that fundamentally there was no changes in the oil market. Supply continues to decline, while demand remains resilient,” Siegfried said.

Analysts at Wells Fargo said in a recent note to investors that the recent downturn of prices below $40 per barrel could’ve indicated operators would be hesitant to discuss capital budgets during earnings conference calls. But despite the weaker commodity price, operators are actually increasing their full-year capital expenditures (CAPEX) by 4 percent.

“We recognize that timing of the activity ramp is very important. An activity increase beginning in August 2016 supports much stronger 2017 production growth than a January 2017 activity increase, for example, and thus the need to ramp spending and activity now, in order to stave off declines and position for 2017 growth,” the analysts said. “Though hard guidance on 2017 production figures remains sparse, our view is that operators are positioning for more growth than the street expects, and we believe the announced spending increases in 2H16 validate that view.”


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