Recent sessions have seen a resurgence for oil benchmarks with the front month contract in Brent rising back above the $56 a barrel level. Despite the OPEC deal to cut output beginning officially at the start of the year, there was some notable weakness in the market with a rally early on during the first session of the year to new highs being met with strong selling. Prices have failed to move above this peak since then but, after holding a major technical level last week at $53.50, once more the ball appears to be in the Bulls’ court.
Last week saw a 3% decline in oil prices due to doubts surrounding the extent of the production cuts promised by OPEC, combined with a steep drop in Chinese exports that weighed on sentiment. Due to the nature of the agreement to implement cuts in production there is no hard evidence as of yet to show any reduction in exports. This in itself wouldn’t be an issue, but with many in the market skeptical of the organisation’s ability to effectively deliver these promised cuts, there appears to be little by the way of benefit given as far as doubt is concerned.
China, the world’s second-largest oil consumer, reported the steepest fall in overall exports in more than six years in a worrying development that has drawn attention back to the ongoing economic slowdown seen in the Far East. Having said that, Chinese crude imports of 8.6 million barrels per bad (bpd) in December were a record and have proved supportive of prices somewhat despite the lingering fears concerning the overall health of the world’s second-biggest economy.
Since then, not a lot has changed materially but a test of the aforementioned level which saw the support hold – along with bullish comments out of Saudi Arabia – have buoyed prices once more. The Energy Minister for the Kingdom has stated that the six-month deal to curb output should be enough to balance the market and probably won’t need to be extended, in comments that boosted the oil price. Despite a large build of over 4 million barrels in last week’s US Department of Energy (DoE) inventory report, the market responded positively to end firmly higher on the day. Despite the many doubts that remain in the market the path of least resistance appears to be to the upside and unless there is material evidence to show a country “cheating” on its output quota, we remain well-positioned for higher prices going forward.