Oil prices have bounced back this morning from yesterday’s tumble with West Texas Intermediate climbing 1.63% and the Brent international benchmark advancing 1.49% as of 11:45 a.m. New York time. The gain still leaves West Texas Intermediate below $50 a barrel at $48.50.
The ostensible reason for today’s climb is a surprise drop in U.S. crude inventories of 237,000 barrels last week, according to the U.S. Energy Information Administration. That’s the first weekly decline in inventories since December. Analysts surveyed by Bloomberg were expecting inventories to climb by 3.13 million barrels last week.
Yesterday, if you remember, oil fell for much of the day after Saudi Arabia said that it was reversing part of its production cut and had actually increased production in February. That still left Saudi production below the levels set in the November 30 OPEC production reduction agreement. Late in the day the Saudis also attempted to reassure the markets that the country remained committed to the OPEC production cuts.
I don’t think this volatility means very much except that there is no trend at the moment and there is a lot of short-term speculative money in the futures market betting that oil prices will break one way or the other. Remember that long positions in crude futures have been running near historic highs. The absence of a trend leaves traders jumping from one side of this trade to the other in an effort to make a dollar and to avoid getting stung with losses.
In other words, the trend right now is that there is no trend in short-term oil prices.
Longer term the picture is not much clearer. The International Energy Agency, which tracks global oil demand and supply and is not to be confused with the U.S. Energy Information Administration, which tracks U.S. demand and supply, said that global inventories rose in January for the first time in six months despite OPEC’s production cuts. But, the agency added, if OPEC stuck to its planned output cuts, the world would see crude demand exceed supply in the first half of 2017 by 500,000, which would begin the process of reducing global stockpiles.
“For those looking for a rebalancing of the oil market the message is that they should be patient, and hold their nerve,” the IEA said.
Which is great advice, unless you’re an oil trader or portfolio manager who has placed a short-term bet on the price of oil.