Can oil avoid repeat of 2015 summer selloff?
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Oil futures had been on a tear since plunging to nearly 13-year lows in February—though prices were sliding lower Friday. After dropping to a closing low of $26.21 a barrel on Feb. 11, West Texas Intermediate crude futures on the New York Mercantile Exchange have nearly doubled, closing at a nearly 11-month high above $51 on Wednesday.
Oil futures CLN6, -1.66% were giving back some ground Thursday, but remained above $50.
The rebound comes as fears about a global glut of crude and sluggish global demand started to fade. Low prices started to finally take a toll on U.S. output while fears of a worldwide slowdown faded. Evidence of the shift was evident this spring, when oil futures rallied despite a failure by major oil producers to agree to a much-hyped freeze. Also, after months of ignoring threats to production, disruptions in Canada and Nigeria have managed to lift oil.
That spoke to an important change in market psychology, said Rob Haworth, Seattle-based senior investment strategist at U.S. Bank Wealth Management.
Speculators had become extremely negative last winter, driving oil to lows in the mid-$20s. But as U.S. rig counts began to see an accelerated decline and fears of a global slowdown subsided, sentiment shifted, he said.
Count U.S. shale-oil pioneer Harold Hamm among the market bulls. Speaking to CNBC on Thursday morning, the founder of Oklahoma-based Continental Resources Inc. CLR, -2.69% hiked his year-end crude–oil target price by as much 20%. He now sees oil ending the year around $69 to $72 a barrel versus his earlier forecast of $60.
Hamm argued that the market has moved back toward balance more quickly than expected, with production falls putting a significant dent in oversupply.
So far, Hamm’s call is looking good. But he—and other bulls—have been burned before.
Oil began its slide in mid-2014, after WTI futures peaked around $107 a barrel. Hamm argued for a rebound in late 2014, telling the Financial Times that oil, which was then trading in the mid-$50s, would rebound to around $85 to $90 a barrel.
Oil did gain ground over the first half of 2015, peaking above $60 a barrel, but then began a sharp leg down in July.
Oil’s current bounce has allowed Continental to recover, rising more than 88% year to date and more than 210% from its 52-week low. That’s salved Hamm’s net worth given his 68% stake in the shale producer.
But could oil repeat last year’s pattern, taking the elevator higher only to fall down the stairs come the second half of the year? While a retest of the February lows may not be in the cards, bulls might find it difficult to sustain a push much above $50 a barrel, Haworth said, in a phone interview.
That’s in part because $50 a barrel is a profitable price level for many U.S. producers, who could rapidly bring some production back on line. Also, July is when refiners often begin to taper demand as they look ahead to the conclusion of the summer driving season around Labor Day.
Meanwhile, much may turn on the outlook for global growth. In a Thursday note, analysts at Vienna-based JBC Energy worried that the global economy is likely near or just past the peak of the current cycle. In fact, with oil unlikely to post further year-over-year price decreases, some of the “wider support” for consumers is falling away, they argued.
“The last recession had a pronounced effect on U.S. and global oil demand, and oil bulls should keep this in mind as a slowdown of demand dynamics would inevitably drag out the much talked about rebalancing of the oil market,” the JBC analysts wrote.
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