Oil prices extended their declines from the previous day as the market tightening is brought into question, and a partially stronger US dollar gave additional headwinds. Compliance to supply cuts among the oil producers appears better than expected, between 80 per cent-90 per cent depending on the January output assumptions. However, the latest supply and demand estimates by the US Energy Administration show that the supply deal largely undoes late last year’s supply excesses. Adding growing Libyan, Nigerian and Iranian exports as well as the US shale boom revival, the oil market’s surplus is unlikely to shrink significantly any time soon.

Late last year’s oil price gains lent momentum to the shale drilling activity in North America. Global oil demand growth is set to slow given the maturity of the business cycle. A case in point, low unemployment and high labour participation rates within the US economy suggest that driving on highways has little upside left. Jobs, not wage growth, translate into additional commutes. Oil remains at the upper end of a fundamentally justified price range supported by excessively bullish market sentiment. We maintain our bearish view, see prices at risk from hedge fund profit-taking in the short term, and stick to our short position in oil.

Oil prices eased as the market tightening narrative is brought into question. We maintain our bearish view and short position as we are sceptical about the supply deal and see imminent profit-taking risks in the futures market.
Source: CPI Financial (By Norbert Ruecker, Head Commodities Research, Julius Baer)