For the first time in over two years, Brent – the international benchmark for oil prices, rallied on Monday to $60.5 per barrel, above its highest level since July 2015, thanks to comments by the influential crown prince of Saudi Arabia about cutting production.
What's our take on the outlook of Oil prices for the rest of the year?
Broadly, we note that the factors that have given oil prices a boost so far this month stem largely from "un-fundamental dynamics" like geopolitical tensions and expectations that OPEC and others will extend production-cut agreement.
Two critical questions are pertinent to the sustainability of the recent rally: 1) Is demand for oil being maintained? and 2) What is the update on OPEC's rebalancing act?
Answering, the large supply surpluses of 2014 - 2016 have vanished, even as bulging demand in Q2 gave rise to the first oil balance deficit the market has witnessed since 2013.
Answering, the large supply surpluses of 2014 - 2016 have vanished, even as bulging demand in Q2 gave rise to the first oil balance deficit the market has witnessed since 2013.
We therefore think the recent precipitous rally is sustainable in the short-medium term, as the market moves further into balance.
Nevertheless, the downside risk remains significant gains in non-OPEC supply, especially from U.S. shale producers.
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