Oil edges up, but set for worst H1 performance in 20 years

Oil edges up, but set for worst H1 performance in 20 years

Brent for August settlement was at $45.33 a barrel on the London-based ICE Futures Europe exchange, up 11 cents.

We saw signs of this earlier in the week, when EIA data on Wednesday showed USA crude stockpiles fell by 2.5 million barrels, more than analysts' expectations of a decrease of 2.1 million barrels.

At the heart of the glut is that rising production levels from the traditional suppliers of OPEC and Russian Federation have been met by soaring output from the United States.

High global oil inventories are "raising market concerns about the efficacy of OPEC market management", said Jason Gammel, analyst at Jefferies. Oil prices are down about 20 per cent this year despite efforts by the Organization of Petroleum Exporting Countries (OPEC) to reduce production.

Rosenberg adds that while fringe USA producers don't need $60 per barrel oil prices to make their debt manageable, they do need $50.

"By early 2018, the combination of record USA production and deteriorating OPEC compliance probably returns average prices to the mid-to-low $40s", J.P. Morgan analysts said in their half-year outlook. Meanwhile, the OPEC production cut deal will last until April 2018 and there is evidence of high compliance among OPEC producers.

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Analysts believe that the oil cartel is at risk of losing further market share to USA shale oil producers, which could cause compliance with the deal to slip in the second half of the year. U.S. distillate inventories rose by 1.1 MMbbls to 152.5 MMbbls on June 9-16, 2017.

But as the chart below from Bespoke Investment Group shows, crude oil production in the U.S.is now back at its highest levels since 2015 and at its highest in the USA since hitting a post-oil crash low late previous year.

And while oil prices may bounce from current levels, a long-term rise in oil prices will simply not be sustained until this imbalance is worked out. "We expect crude oil prices to trade negative on the back of increased supply from several key producers", says brokerage firm Sushil Finance.

"We anticipate renewable energy reaching 74 percent penetration in Germany, 38 percent in the United States, 55 percent in China and 49 percent in India by 2040 as batteries and new sources of flexibility bolster the reach of renewables", the report says.

It is highly unlikely that oil will completely go obsolete but it is gradually going out of fashion which makes it hard for the commodity to crawl out of the bear trap it has now entered.

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