Why crude oil may be poised for a correction

Despite the more than Half gain in oil since mid-February and prices looking relatively stable around US$40 per

barrel, few are convinced the force is here now to remain.
Commodity analysts at Macquarie Capital are calling for a correction in oil prices to the mid-US$30 to low-US$30 range.

“Although we’re constructive over the medium and long-term, the current oil price recovery has occurred against a backdrop of weak fundamentals,” Vikas Dwivedi said in a research note. “From here, under appreciated bearish fundamentals, plus stagnating (bullish) externalities, should reverse the rally.”

He noted that the oil price rally was likely initiated by inflows from both institutional and retail investors, while the moves higher accelerated thanks to several bouts of short covering since mid-February.

The analysts cited a summary of short-term factors working against oil.

One such driver is always that Iranian oil exports are in front of schedule, with 500,000 barrels per day expected in the next fourteen days.

Meanwhile, oil tanker loadings in Saudi Arabia are up 300,000 barrels per day when compared to fourth quarter of 2015. So despite its production freeze, Macquarie noted that destocking and much more natural gas use could boost the country’s exports.

The analysts also highlighted the recent US$125 million outflow in the United States Oil Fund ETF, warning that this selloff could accelerate if the rally stalls.

Then you have the U.S. dollar, where weakness hasn’t only slowed, but the currency has actually rebounded following its sharp decline that began in late February.

But despite Macquarie’s short-term bearish call, the analysts remain rather bullish on oil for the next few years. They are forecasting WTI crude prices to return to US$70 per barrel in 2018.