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Will Crude Oil Gains Hold?

Barry Norman

Will Crude Oil Gains Hold?
Crude oil made a stunning recovery on Thursday adding 10% making all the headlines around the globe. Oil remains on the rebound this morning adding 41 cents to trade at 42.97. Brent oil climbed by 12 cents to 47.81 with the spread narrowing to under $5 indicating an imbalance in market prices. Crude is expected to give back some of its gains.

Commodities were the major talking point; however, as oil recorded a remarkable 10 per cent rally and copper drew its biggest one-day surge in two years. The extent of the one-day bounce suggests more volatility for commodities in coming days, but for now oil producers are breathing a sigh of relief as US Nymex crude soared 10.3 per cent to $42.56 and global benchmark Brent crude leapt 10.3 per cent to $47.56.

It represented the finest day for oil markets since March 2009 as bargain hunters stepped in with vigor on signs of strength in the US economy, Shell’s declaration of a force majeure on its Nigerian oil exports and further indications of falling crude inventories in the US.

There were signs that Thursday’s rally, while extreme, may not be long lasting, traders said. Inter-month spreads, often a good indicator of physical market conditions, weakened on the day, while turnover was high but not extreme. Front-month Brent crude traded just over 315,000 lots, the most since early July but a quarter less than early February highs. Even notionally bullish news came with a bearish context.

The rally came after the Commerce Department reported the US economy expanded at an annual rate of 3.7 per cent in the second quarter, much above the initial appraisal of a 2.3 per cent gain. The more robust April-June growth mainly reflected higher investment, state and local government spending, and consumer spending than was reported in the initial estimate.

The strong US economic figures also added momentum to a global stock market rally that lifted bourses that have lost trillions of dollars in value in a rout over the last week or so.

Analysts said the oil contract also benefited from technical factors after recent trades left the commodity in an “oversold” state and lingering below the psychologically important $40 a barrel level.

The price of Brent crude again plummeted in the last two weeks. The collapse was again due to concerns about growth in demand in China, as local authorities have still failed to ‘bring under control’ the significant fall in stock prices, which also intensified questions regarding the reliability of Chinese macroeconomic statistics. Bear in mind that China is the second-largest oil consumer globally – right after the United States – and should continue to be the key driver of the demand growth for this commodity in the quarters to come as well. All of this is taking place against the backdrop of the persisting comfortable supply situation. Here we should mention comments by Iran’s Minister of Petroleum, who has said that his country will increase production ‘at any cost’ if the sanctions are lifted only to defend its market share.

Nevertheless, despite the dramatic price fall, the situation on the physical market in North Sea oil does not seem to have continued to deteriorate in recent days and has tended to stabilize. The ICE Brent time spreads are far from the values seen, for example, early this year, when oil also cost less than US$50 a barrel.

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