Can Oil Rally Hold?

Can Oil Rally Hold?Can Oil Rally Hold?

Global markets skyrocketed on positive economic data coming from the United States and subsiding fears of a China-induced global meltdown on Thursday.

In the second quarter, the US economy expanded at a 3.7% annual rate, sharply up from the original estimate of just 2.3%.

That sparked a massive rally, with oil prices shooting up by more than 10%, the most in a single day since 2008. It was not just the solid growth rate from the US that caused oil prices to jump.

Royal Dutch Shell also declared force majeure on its oil from Nigeria, after it was forced to close two oil pipelines. Oil theft, sabotage and violence are rampant problems for oil producers in Nigeria, Oilprice reported.

Traders also covered their short positions, which have piled up in recent weeks. With so many traders on the short side more than usual, this week’s drop had many taking profits and covering their positions. That sparked a one-time jump in oil prices, one that was inordinately large.

As such, oil prices could level off instead of continuing their rally, as traders refocus back on the fundamentals of the market, which do not necessarily look bullish. As of midday trading on August 28, oil prices were up by over 1%.

The coming months could see the refining sector start to lose some steam as peak driving season comes to an end.

BP’s CEO Bob Dudley said that while downstream profits have been “very, very strong,” as we enter autumn months, downstream profits may not remain at such heights.

“Actually, we see some of those correcting,” he said.

Also, Saudi Arabia is bringing new refineries online, which could increase the supply of refined products, potentially resulting in a glut that will further push down prices.

Total’s CEO said the downstream sector is in a “crisis”, and his company plans on slashing its refining capacity by one-fifth over the next two years.

OPEC, led by Saudi Arabia, will continue its current policy of pursuing market share. The group has a target level of production set at 30 million barrels per day, although the organization’s members are collectively producing well in excess of that level.

Moreover, as each producer is suffering from shrinking revenues, they are responding by trying to ramp up production to compensate. That means without cohesion, OPEC’s collective output could continue to increase, led by gains from Iran and Iraq in particular.