Trying to guess what the price of oil will do in the next week, month or year has always been a challenging sport. However, over the past 12 months, the game has become impossible as the oil market swings wildly on every piece of news flow that hits the wires.

 

In fact, all swings have become so wild and unpredictable this year that the price of WTI has crossed between bull and bear markets more times in the past eight months than at any other time since 1998. As the Wall Street Journal reported last week:

“Oil slid 47% between October 2015 and Jan. 20. It then popped 27% over the next seven trading days, before falling 22% over the next nine. From Feb. 11, oil staged a 95% rally through June 8, before it started falling again. Crude sank 23% through Aug. 8, and since then has climbed a similar amount.”

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Ignore the headlines the oil market is improving

In such a volatile trading environment, it is easy to get caught up in the news flow of the day and lose sight of the bigger picture, which is exactly what Barclays’ commodities research team warns of in a research note sent out to clients today:

“With market sentiment shifting with every new bullish or bearish headline, observers may tend to miss the forest for the trees. The market is rebalancing, so beware the cherry-picked headline that fits the flavor of the day.”

As the quote above indicates, Barclays’ commodities research team is bullish on the price of oil over the next 12 months as they believe the market is already rebalancing. This opinion is at odds with several other commentators who believe we are now in an environment of lower oil prices for longer. Still, here are the five key themes behind Barclays’ bullish forecast.

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OECD inventory levels appear high but dig deeper and…

“There are 4.5 billion barrels of industry and government stocks swishing around the globe, 3 billion of which is held by industry. Though the high absolute level lends itself to bearishness, the composition matters…of the 330mb of stockbuild since January 2014, 55% has come from crude, yet gasoline stocks are actually lower on average than at the outset of this downcycle, and more than 20% of the growth has come from NGLs, feedstocks, and ‘other products’ “

Observers should not cherry pick US production dynamics:

“Some analysts and media are often eager to cite the experience of certain tight oil producers but fail to put into context their crude production level. Based on our analysis with Rystad data, taking the experience of the top 50 companies by production in 2015 would ignore the dynamics under way in 30% of lower 48 onshore US crude and condensate production…some of those other companies are extremely cash strapped and are facing steep declines.”

Hyper focus on the Permian:

“By Rystad’s breakout, the Permian’s growth in 2016 comes almost entirely from just ten companies: ExxonMobil, Shell, Chevron, Carrizo, Concho, Pioneer, EOG, BHP, Anadarko, Oxy, and Parsely Energy. These ten companies are forecast to grow by 100 kb/d in 2016, offsetting declines elsewhere in the play. Therefore, though these companies stand poised to outperform, it remains unclear what the other hundreds of companies will Physical market rebalancing continues.“

Stock builds have slowed:

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“OECD petroleum stocks are building at a lacklustre rate, down to less than 0.4 mb/d in 1H from the recent peak of slightly above 0.8 mb/d in 1H 2015. We estimate the world petroleum stock build rate minus China’s implied crude stock build at 0.3 mb/d in 1H16, half the 1H15 rate of 0.6 mb/d. do in the Permian.”

Demand growth is set to re-accelerate:

“Global demand growth has decelerated from about 1.6 mb/d in Q1 to 1 mb/d in Q3. However, we expect non-OECD demand growth to accelerate again over the next six months, as the effect of lower oil prices in a weaker US dollar environment helps EM consumers. Also, there are pockets of improvement in industrial activity emerging in key EM Asian consumers.”