"Oil Bulls Beware: This Optimism Is Unjustified"

 Source:

https://oilprice.com/Energy/Energy-General/Oil-Bulls-Beware-This-Optimism-Is-Unjustified.html

"Optimism seems to be ruling global oil markets at the moment.

Even the recent OPEC report, in which the global oil group cut its demand predictions for Q2 2021 by more than 690,000 bpd, seemed unable to alter price assessments.

Bullishness stemming from the OPEC+ production cuts continues to rule the market, with analysts happy to assume that the cartel will remain optimistic in its assessment of H2 2021.

With oil prices hovering around $70 per barrel and some analysts even suggesting that the fabled $100 per barrel is within sight, it seems all sense of realism has been lost.

Brent is set for its eighth straight week of gains, and the market is happy to all but ignore the fundamentals.

Analysts seem convinced that demand recovery in the second half of 2021 is a certainty.

If you were to ask them what that assumption is based on, there is no specific answer but rather a reference to ‘sentiment’.

Biden’s recent announcement that Americans could be having barbecues with their families on the 4th of July, that sentiment is only growing stronger.

... oil prices seem to be more closely linked to the cash injections being given out around to world than to historic fundamentals.

... In the coming months, demand is expected to weaken slightly, as highlighted in OPEC’s recent report.

The bullish sentiment in oil markets seems based on the period after summer though.

Strong demand in the second half of the year will depend on successful COVID vaccination schemes and a decrease in global lockdowns.

If the optimistic predictions of a successful summer fight against COVID don’t come true, oil bulls are set to be slaughtered.

... Media reports have been fueling this optimism, as most investors prepare for the recovery of crude oil demand.

Fuel analysts are confident that driving season in the U.S. and Europe will increase prices despite most vaccination projects still being far from complete.

With no real travel increase on the horizon, a fuel demand increase seems far from certain.

... When looking at current price settings, hovering around $70 per barrel, and plenty of bullish sentiment amongst analysts, observers should be worried.

... The current stability on the supply side is purely cosmetic.

OPEC+ unexpectedly decided to roll-over its existing agreements for another month.

Saudi Arabia is still supporting its unilateral 1 million bpd cut, while others are keeping to their existing commitments.

Non-OPEC producers Russia and Kazakhstan were allowed to increase their production slightly.

... $70 per barrel is a very enticing level to increase production, and cash is needed throughout OPEC+. OPEC+ producers have lost trillions of dollars in the past year, and now they have the ability to make up for that loss.

At $70 per barrel, producers not controlled by OPEC+ are also looking to boost production.

Profit margins of $10-15 per barrel are too high for most producers to ignore.

JP Morgan’s recent assessment suggests that U.S. shale is going to be bringing more production online soon.

... Market analysts should be keeping an eye on Saudi Arabia, the UAE, and Russia. It is likely that all three markets are already producing more crude than is being reported.

... Greed is the blood of capitalism, and the oil and gas market has some of the most tempting profit margins out there at the moment.

While optimism may be ruling the market right now, bearish sentiment could flood back into oil markets very soon.

At current prices, supply is certain to increase, while demand is far from guaranteed.

It is too early to call it a bear market, but observers should be wary of being overly optimistic when the fundamental balance of the oil market remains decidedly delicate."