Oil on the New York Mercantile Exchange breached $71 a barrel this week, a seven-month high, helped by buoyant global risk appetite and a weak dollar. Bullish oil traders were given further ballast on Wednesday, when America reported a large drawdown on oil stocks last month.
What the commentators said
But the rally is on shaky ground. As Capital Economics noted, it is hope of a global recovery, more than anything solid, that is supporting the price of oil. Commodity firms have taken advantage of lower oil prices to rebuild stocks in anticipation of a pick-up in demand, while Opec has heralded a rebound in Asian markets. But much of the recent oil demand from the region has simply been down to stockpiling.
And while US oil stocks dropped this week – “unsurprising, given the looming US summer driving season, said Daniel O’Sullivan of Investors Chronicle – global inventories remain close to all-time highs. The Opec May Oil Market Report shows production actually rose between March and April. “Crude oil prices are divorced from the underlying fundamentals of weak demand, ample supply and high inventories,” said Deutsche Bank’s Adam Sieminski.
What next?
How might the irrational rally end? With oil this high, the Chinese might have second thoughts about stockpiling – especially since their four emergency fuel tanks are already full. And oil traders who have been renting tankers to store oil must be sorely tempted to take profits and dump their inventory on the market. This could cause the market to stall, while the fundamentals should be back in the spotlight as “market optimism towards the global economic outlook starts to unravel”, said Sieminski. Oil looks likely to head below $50 again soon.