Oil Bulls Still at Stake

Oil investors seem to buy the idea that recovery is finally underway after three years of gluts, but a price boom seems unlikely as the options market shows that at least until OPEC's supply deal expires, producers will pounce on any rallies.

Brent crude oil price has gained about 20% in the last two months to above $52 a barrel, doggedly posting higher highs and higher lows, which would suggest this rally is more robust than the recoveries seen in March and May this year, Reuters reported.

"It has been a good rally since June but now crude oil has to prove that it can break its downtrend channel," Petromatrix analyst, Olivier Jakob, said.

Investors have been rattled by nagging doubt about the ability of the Organization of Petroleum Exporting Countries and its partners to stick with a pledge to restrict output by 1.8 million barrels per day until March, especially given resurgent output from Libya and Nigeria, which are exempt.

A 10% rise in US production this year and the painfully slow decline in global oil inventories, which OPEC says must return to their longer-term average before the output restriction can disappear, has fed trader and investor skepticism.

Since OPEC and its 11 partners, including Russia, began curtailing production in January, oil inventories across the world's most developed nations have risen by around 40 million barrels and are still some 200 million barrels above their five-year average, OPEC's target.

However, year-on-year, inventories have fallen for two months in a row, marking the first annual declines in stocks in over three years, according to data from the US Energy Information Administration.  The premium of oil for delivery in December this year compared with December next year has fallen to just 62 cents, from nearly $2.50 at the start of July.

The so-called "Dec./Dec." spread traded at an average premium of nearly $4 a barrel from late 2014 to early this year, when that structure turned negative after OPEC and its partners in late 2016 reached their historic decision to cut supply.