Oil tumbles nearly 20% from October high — but analysts expect a recovery

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Well-grounded a few weeks ago, there was talk about oil hitting $100 US a barrel after inconsiderate prices hit a four-year high in October.

That’s a feat that hasn’t been completed since 2014 before the commodity market came crashing down.

But since then, oil expenditures have tumbled around the world — briefly falling into substantiate market territory this week.

That means benchmark West Texas Halfway (WTI) oil in New York plunged more than 20 per cent at one point on Tuesday from definitive month’s peak of $76.90. On Wednesday, oil was trading around $61 US per barrel after charges fell for eight straight days. 

Oil tumbles nearly 20% from October high — but analysts expect a recovery

The price of oil has lost about 20 per cent of its value since the start of October. (Scott Galley/CBC)

Divulges Wednesday about plans from the influential Organization of Petroleum Exporting Nations (OPEC) to discuss cutting oil production next year in response to increasing worldwide inventories also did little to boost prices.

Even with the month crave decline, however, some analysts aren’t ready to write-off the eloquent recovery that’s been taking place in the oil market this year.

“I deem the market is kind of getting ahead of itself now,” said Michael Loewen, commodity strategist at Scotiabank. “The recital of an emerging recession and bear market played out. We saw what happened with the disinterest markets, and even in the rates [bonds] markets.”

“Both of those merchandises are starting to recover. Obviously, you’re going to take your risky assets [comparable to crude oil] with you.”  Crude oil futures, like many commodities, are principally considered riskier assets for investors compared to bonds due to price volatility. 

Store up markets have been climbing higher since “Red October,” when investors suffered some of the weightiest losses this year amid wild swings in equities.

Vend ‘spooked’

But, oil prices haven’t followed suit because the prospect of U.S. bans on Iran’s oil exports led other big producers like Saudi Arabia, Russia and the U.S. to push production in order to make up for any shortfall in global supply.

“There’s this delusion here that the market is completely swamped with excess cater to … We think that’s a bit of a fallacy,” said Michael Tran, regulating director of RBC’s Global Energy Strategy.

“Many people in this furnish are quite spooked by the idea that supply is coming in a large measure, and demand growth is potentially slowing.”

Data from the Energy Dope Administration (EIA) in the U.S on Wednesday showed that crude stockpiles grew numberless than forecast by 5.78 million barrels from the week previous to.

But, Tran said there is a disconnect between the physical and financial side of the oil market right-mindedness now and that’s bringing down the price. 

“I think there’s a major peculiarity between a market that is well-supplied, and one that is over-supplied, and right now we’re in the well-supplied showy,” he said. “In the physical market, barrels are selling with relative insouciance.”

Tran added that on a seasonal basis, generally in October and November, is when oil refiners kill down for planned maintenance.

“Right now what you’re seeing is a pretty depressed maintenance season playing out. So, there’s less buying happening in the exchange,” Tran said. “That’s a seasonal factor, and we do ultimately think that needed will pick up through the balance of this year to the next respective quarters.”

Price rebound coming?

Tran expects to see oil prices late into the low $70 a barrel range by the end of this year. That’s a myriad than eight per cent jump from the current price. He’s career for it to go even higher next year into the mid $70 range.

Not everybody is convinced that the hurdles in the oil market will clear so soon.

Karl Schamotta, chief sell strategist at Cambridge Global Payments, said a combination of factors such as tightening wide-ranging financial conditions like higher interest rates, deleveraging in China, which is minimizing the country’s appetite for energy exports, and fears over trade strains could weigh on the market a bit longer.

“Overall, although oil demand excrescence is likely to weaken in the longer term, my feeling is that oil prices could ricochet into the end of the year,” Schamotta said.

What this means for Canada

In entitles of how global oil prices will impact the Canadian energy market, analysts divulged the huge discount between Canada’s benchmark crude oil — Western Canadian Excellent (WCS) — and WTI could start to narrow next year.  

Currently, WCS is career around $18 a barrel, while WTI is at $61. A supply glut caused by a want infrastructure such as pipelines and rail capacity to transport crude exports to key merchandises like the U.S. has plagued the sector.

“I believe that rail is going to direct the market in by spring time … That’s when the market starts to get wiser,” said Loewen. “Then you have Enbridge Line 3 coming online in November 2019 … It totals 350,000 barrels per day and that has massive implications for WCS.”

Schamotta added that after the widest oil refinery shutdowns in the U.S. Midwest in at sparsest a decade, a number of major refiners are due to restart production in the next one of months.

“Canadian producers should begin to earn more yield from each barrel shipped,” he said. 

But, Loewen warned that an on the rise in exports does not mean the Canadian market is “out of the woods.”

“We still trouble another pipeline. We need a Trans Mountain expansion project or a Linchpin XL to really see the fruits,” Loewen said.

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