Oil Trading in Sweet Spot Adds to Improving Economic Signals
By Amrith Ramkumar
Oil prices have stayed in a contained range that analysts say
benefits both producers and consumers, bolstering hopes that the
global economy can rebound.
U.S. crude has generally stayed between $50 and $60 a barrel in
the past six months and is on pace for its best year since 2016
following a sharp selloff late in 2018. Brent, the global gauge of
prices, has also been steady and traded between $55 and $65.
Because it is critical for the transportation and shipping
industries, oil is used by some investors to gauge momentum in the
economy. Prices had sent an alarming signal when they tumbled
earlier in the year, hurt by worries that crumbling demand would
result in a glut. But recent progress toward an initial U.S.-China
trade accord and stabilizing economic data around the globe have
fueled bets on an improving picture for consumption.
The stability is a boon for large energy producers world-wide,
many of which have curbed output to boost prices. Saudi Arabia's
state-owned oil company, known as Aramco, is expected to go public
in the coming days and is seeking a valuation of $1.6 trillion to
$1.7 trillion, which could make it the largest initial public
offering ever. Saudi Arabia is the world's largest crude exporter
and is expected to join other large producers in OPEC in extending
production cuts when the group meets later this week in Vienna.
While oil is still well below its April highs, some analysts say
prices are high enough to support profits at some energy companies
without dramatically increasing gasoline costs for consumers and
imperiling economic growth. Coupled with gains in stocks, Treasury
yields and industrial metals such as copper that are crucial to
manufacturing, the oil-price movements also show how investors have
turned optimistic after fearing a recession just four months
"More and more people are starting to believe things are getting
better, " said Nathan Thooft, head of global asset allocation at
Manulife Investment Management. "An oil price that is climbing
based on better sentiment is fine as long as it doesn't get out of
control...We have some room before it would cause any alarm bells
to start ringing."
Mr. Thooft holds a larger position in stocks than the benchmark
he tracks, believing the recession fears that hurt markets earlier
in 2019 were overblown.
Those worries had hit oil, with many analysts expecting crude
from smaller producers Norway, Brazil and Guyana to exacerbate
supply surpluses in 2020. Now, the combination of improving demand
and lower-than-expected output from OPEC and U.S. shale producers
has given some investors confidence prices can remain stable.
"Certainly it feels better today than it did three months ago,
six months ago," said Noah Barrett, an energy research analyst at
Janus Henderson Investors, which favors companies like EOG
Resources Inc. the firm believes can still generate solid earnings
even if crude prices pull back. "We look pretty well balanced in
Net bets on higher U.S. crude prices by hedge funds and other
speculative investors rose to their highest level in two months
during the week ended Nov. 26, Commodity Futures Trading Commission
figures show. The ratio of bullish bets to bets on lower prices is
nearly 6:1, well below April's peaks but still much higher than it
was in mid-October.
In another optimistic sign, front-month crude futures now exceed
prices for delivery in future months. This condition encourages
traders to sell oil rather than store it, helping avoid a buildup
that could hurt prices. It also means investors don't incur a "roll
cost," the premium to buy next month's futures when the current
"Investor sentiment is slowly starting to change," said Abhishek
Deshpande, head of oil-market research and strategy at JPMorgan
Chase. "At this stage they're saying, 'OK, maybe there's a chance
of a better return in oil.' "
Mr. Deshpande now projects global oil supply to trail demand in
two quarters next year, after in June projecting production to
exceed consumption in each quarter of 2020.
The improved mood has spread to shares of some producers. The
S&P 500 energy sector has risen 2.2% in the past three months,
trimming some of its drop in the past year. Shares of companies
such as Pioneer Natural Resources Co. and Cimarex Energy Co. that
have pledged restraint with spending in 2020 are among those that
have rebounded slightly.
"I'm definitely becoming more optimistic that we're probably at
the bottom end of the cycle regarding oil price," Pioneer Chief
Executive Scott Sheffield said on the company's third-quarter
earnings call Nov. 5.
Still, some analysts remain wary of another reversal,
particularly if snags in trade talks prompt a retreat from riskier
investments. U.S. production has climbed to fresh records in recent
weeks, even as the number of rigs drilling for oil drops, keeping
inventories plentiful. And stockpiles in developed nations also
remain well supplied, increasing focus on indicators of fuel
"You could see this view change very quickly," Mr. Deshpande
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(END) Dow Jones Newswires
December 03, 2019 08:14 ET (13:14 GMT)
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