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Is The Current Oil Price Rally A 'Head Fake'?

Is The Current Oil Price Rally A 'Head Fake'?
 
With oil prices at their highest level since 2015, the next stop along the way seems to be $70 per barrel. However, some analysts see the more likely scenario as a retracement back down to lower levels.
 
 
A “perfect storm of events” helped push oil prices to their current levels, according to Barclays analysts in a recent research note. However, those factors - cold weather in North America, unrest in Iran, strong economic growth and technical buying from hedge funds and other money managers - may not be enough to keep the oil rally going, the investment bank says.
 
The risk to oil prices is “skewed to the downside from here as fundamentals on the horizon suggest a reversal is in order,” Barclays analysts, led by Michael Cohen, said in a January 5 research note. While the recent oil price rally was bolstered by some unexpected events, the forces that will spark a reversal are more predictable—rising U.S. oil production will lead to another surplus of inventories in 2018.
 
WTI rising up above $60 per barrel only magnifies that trend, a price level that will likely spark a deeper drilling response. A recent survey of U.S. shale industry executives by the Dallas Fed suggests that the rig count will “substantially increase” with crude prices between $61 and $65 per barrel. At the start of this week, WTI stood at about $61.50.
 
The line preached by a long list of shale companies at the close of 2017 was one of capital discipline - a renewed focus on profits and not simply one of growth-at-all-costs. Pressure from shareholders has raised the prospect of a more conservative approach to drilling, which could limit the response from shale companies even as oil prices rise. Several high-profile shale drillers said that they would maintain a prudent drilling position even in the face of rising prices.
 
But that remains to be seen. Barclays, for its part, is skeptical. “We think that some of the incremental cash flow received from higher oil prices will filter down” to higher spending on drilling, the bank argued. If the shale industry calibrates its drilling campaign to $60 per barrel, as opposed to $50–$55 per barrel as it had previously, the result could be much higher production this year.
 
Barclays says the U.S. could add 1.4 million barrels per day (mb/d) in 2018 compared to the baseline assumption of 1 mb/d. An extra 400,000 bpd is equivalent to nearly a quarter of the combined OPEC/non-OPEC cuts.
 
That supply response poses pitfalls for the current oil price rally. But the demand side of the equation would also undercut prices. Demand could end up being weaker than anticipated precisely because prices have moved up so quickly.
 

Continued: https://www.zerohedge.com/index.php/news/2018-01-10/current-oil-price-rally-head-fake