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Analysts Just Aren’t Buying the Oil Rally

Questions remain over current high oil stockpiles and the potential for increased supply

By GEORGI KANTCHEV

Updated April 28, 2016 6:35 p.m. ET

Even as oil rallies, analysts have barely nudged up their price forecasts as they worry that crude’s recent gains might not be sustainable.

The price of oil has jumped 76% from the decade-low it hit earlier this year. That is mainly on hopes that dwindling U.S. oil production will help take crude out of an oversupplied market.

But many analysts aren’t buying the rally. They question whether the glut is indeed on the wane given current stockpiles and the potential for increased supply from Iran and elsewhere. They point out that last year, the oil price also rallied in the spring on a belief supply was falling, only to collapse in the year’s second half.

A survey of 13 investment banks by The Wall Street Journal sees Brent crude, the international oil-price benchmark, averaging $41 a barrel this year, up $1 from the same survey conducted in March. The banks see West Texas Intermediate, the U.S. oil gauge, averaging $39 a barrel this year, broadly unchanged from the prior survey.

Oil settled higher Thursday for the third consecutive session. Front-month Brent crude for June delivery rose 96 cents, or 2%, to $48.14 a barrel. U.S. futures rose 70 cents, or 1.5%, to $46.03.

“We are already seeing signs that the market will balance eventually, probably at the turn of the year,” said Gareth Lewis-Davies, senior commodity strategist at BNP Paribas. “But until then, we still have a big oversupply to worry about.”

Despite the talk of falling supply, analysts point to increases in oil stockpiles around the globe that threaten the rebound. According to Citigroup, global crude inventories have risen to records, with 370 million barrels of crude entering storage since January 2014.

Other factors that have supported prices in recent weeks, such as production outages from Nigeria to Venezuela and a weaker dollar, also might prove temporary, analysts say.

Continued weakness in oil prices will bring further pain for oil-producing countries and energy stocks. Cheap crude, however, is welcome news for consumers and businesses around the globe.

U.S. data in recent months has showed robust demand for oil products, such as gasoline, as drivers chalk up more miles on the road. Chinese data also indicate firm demand, a relief for the oil industry given forecasts of a slowdown in the world’s second-largest oil consumer.

That uptick in demand, though, might not be enough to support the oil price.

Oil storage tanks stand in this aerial photograph taken above Cushing, Okla., on March 24, 2015.ENLARGE
Oil storage tanks stand in this aerial photograph taken above Cushing, Okla., on March 24, 2015. PHOTO: BLOOMBERG NEWS
Some analysts believe the current rally could mimic last year’s. Then, Brent jumped about $20 a barrel between January and May before stumbling later in the year.

Banks surveyed now forecast Brent averaging $39.25 a barrel in the current quarter and rising to $42.30 in the third quarter. Some of the banks, including Morgan Stanley and ING, see prices falling in the third quarter.

“I’m very concerned that this rally might also run out of steam soon,” said Eugen Weinberg, head of commodities research at Commerzbank. The bank sees Brent averaging $45 a barrel in the third quarter. “Everybody’s focusing on the falling U.S. production, but there’s a lot more crude coming from other places,” he said.

Earlier this month, major oil-producing nations failed to agree on a production freeze after Saudi Arabia appeared to walk away from any agreement that didn’t include geopolitical rival Iran.

That reminded analysts that there is more oil that could enter the market. Iran has vowed to keep pumping oil until it regains the market share it lost during years of international sanctions.

Citigroup estimates that Iranian exports ran at about two million barrels a day in April. That is close to presanction levels of 2 million to 2.5 million barrels a day.

The ramp-up in Iranian production, coupled with a seasonal production increase in Saudi Arabia, could offset the declines in U.S. production this year, Morgan Stanley said.

“Doha’s failure could set up a market-share war with many producers now calling for growth,” Morgan Stanley said.

Investors, though, seem unfazed. Bets by hedge funds and other money managers that the oil price will rise jumped to record levels in recent weeks. Net long positions in Brent, or bets that it will gain, increased to 418 million barrels last week, according to exchange data. Investors also have made more bullish bets in WTI than at any time since May last year.

That investor optimism carries its own risks. If sentiment changes and those funds start to unwind their bets, the price of oil could see a sudden lurch southward.

“The extreme long speculative positions from many of these funds could prove problematic,” Morgan Stanley said.

Most banks, at least, see prices rising next year. Analysts surveyed by the Journal forecast an average Brent price of $57 a barrel in 2017.

But underscoring how analysts have become more pessimistic through this year, the same banks were predicting last August that Brent would rise above $70 a barrel this year. Hitting that level has been postponed to 2018 by these analysts.

Write to Georgi Kantchev at [e-mail]

http://www.wsj.com/articles/analysts-arent-buying-the-oil-rally-1461840804