After declining by more than 20 percent from the October peak, oil prices are showing some signs that they have now bottomed out.
WTI hit a low point at $56 per barrel on Wednesday and Brent hit a low just below $65 per barrel. Both crude benchmarks regained some ground at the end of the week, despite the huge increase in U.S. crude oil inventories. In fact, rising prices in the face of the 10-million-barrel increase in crude stocks suggests that oil may have already hit a bottom. “Price reaction to the US inventory data shows that negative news is now largely priced in,” Commerzbank said in a note. “This is the only way to explain why an increase in US crude oil stocks of a good 10 million barrels failed to put further pressure on prices.”
At the same time, crude stocks have now climbed for eight consecutive weeks, surely a sign that the market is decidedly back in a surplus situation. That is bearish, to be sure, and helps explain the collapse in oil prices over the past month.
But it also significantly increases the odds of a response from the OPEC+ coalition in early December. “[W]e believe oil is oversold and will likely bounce up from the current levels, as OPEC+ dials back production in December,” Bank of America Merrill Lynch said in a note on Wednesday. The bank said that it no longer sees Brent rising to $95 per barrel next year, as it previously thought, noting that “oil bulls have capitulated and so have we.”
However, the liquidation of net-long positioning by hedge funds and other money managers has taken a lot of pressure out of the market. As a result, there is more room on the upside once again. “[T]he oil market is a lot cleaner now from a positioning standpoint. Given that inventories are still not too high, we believe oil prices should find some support from a fundamental perspective,” BofAML wrote.
Barclays pointed to some fundamentals to suggest that things aren’t as bad as they seem. For instance, OECD stocks in terms of “days of demand cover,” remain below the five-year average. “Based on our balances, we expect the amount of inventories in the OECD on a days of demand cover basis to remain supportive of prices through the end of next year,” Barclays said in a note.
