Oil prices have seen gains this morning with Brent crude adding 0.8% to reach $56.44 a barrel shortly before markets opened in London. WTI rose 0.7% to $54.35 a barrel. Both international benchmarks fell at the end of last week on the U.S. Energy Information Administration’s week inventories report, which showed that crude inventories had again been added to, with an increase of 564,000 barrels. Despite the fact that inventories standardly show a build at this time of year, and the fact that last week’s figures were significantly lower than forecasts, the fresh gains added to concerns over how long it will take for bloated inventories to drain once OPEC supply cuts begin to bite.
With oil prices remaining in the tight $4 range within which they have been confined all year, the question is when are we likely to see a breakout, and in which direction? With big net hedge fund bets long on oil, the industry clearly expects the cuts of 1.8 million barrels a day OPEC exporters, and partners such as Russia, are making to supply to boost prices in coming months. However, doubts remain as to whether they will be enough to significantly reduce bloated global inventories, especially with other producers, notably U.S. shale gas producers, ramping up production. Many commentators now believe that to be effective even in the middle-term, the initial six month commitments to cuts will need to be extended.
Speaking at the International Petroleum Week last week hosted in London, University of Oxford Professor of Energy Policy Dieter Helm outlined his reasoning that despite OPEC supply cuts putting a floor under oil prices, they should be expected to show a longer term trend of gradually falling. Helm believes that historical trends support his theory and indicate a lack of correlation between rising demand and prices.
Quoted by MarketWatch, Helm posited:
“So, OPEC may have cobbled together something for six months, in my view relatively ineffectively, but this is a temporary dam and it is very, very likely that it will fail.”
In contrast to the academic’s view, oil company executives and financial market traders remain upbeat. At the same forum, many investment banking representatives and traders said they were targeting $70 a barrel by the end of the year. However, the two positions are not necessarily mutually exclusive as oil could show shorter term gains this year on the OPEC initiative, while the longer-term trend could still be for oil prices to cheapen.
Over to gold price, Friday’s gains which took spot gold to three and a half month highs held flat this morning. Spot gold was at $1256.93 this morning as markets prepared to open in London and gold futures at $1258.