CALGARY — The frantic sell-off in crude markets this week underscores the fragile nature of oil prices, as analysts and traders grapple with a stubborn supply-demand imbalance that can never seem to rectify itself.
West Texas Intermediate futures have remained mostly in the US$50 range ever since members of the Organization of the Petroleum Exporting Countries agreed to curb oil supplies in November. But beginning in mid-April, prices began to plummet, and then collapsed Thursday.
The drop introduced a new level of uncertainty into the oil market, perplexing those who track the price of oil.
“There’s nothing concrete that I think explains the move,” said Anish Kapadia, a senior research analyst at Tudor, Pickering, Holt & Co. based in London.
Tudor analysts said in a Friday research note that part of the steep drop in prices could be attributed to trading algorithms in the market, which can lead to widespread sell-offs once prices reach a specific threshold.
“All of these algos are similar to each other and they all respond to the same triggers,” Kapadia said.
On the other side of the sell-off, Kapadia said, most long-term bets on oil have already been made, which tends to exaggerate negative fluctuations in the market.
Futures contracts for West Texas Intermediate dipped into the US$43 range in morning trading on Friday before settling back above US$45 later in the day.
The modest correction came after prices plummeted five per cent Thursday. Brent crude dropped below the US$50 threshold for the first time since OPEC’s supply cut, spurring fears that crude could again be treading into a prolonged bear market. Brent futures settled at around US$48 in early afternoon trading Friday.
Prices began to fall on Wednesday after data showed U.S. stockpiles were higher than traders expected, appearing to validate concerns that U.S. shale production growth is keeping the market in a perpetual state of oversupply. Meanwhile, Chinese manufacturing data released this week seemed to point to weakening demand in the country.
However, most analysts say those recent data points don’t account for the depth of the recent sell-off. And yet, while many still maintain that prices will continue to rise gradually in the second half of the year, the timeline for higher prices is gradually being stretched longer.
“It seems it’s going to be a hard road ahead to get considerably higher than where we are now,” said Matt Smith, the director of commodity research at ClipperData.
Uncertainty around oil prices has plagued producers over the past two years who, despite improving results in the first quarter of 2017, remain under heavy debt loads and short on capital-raising options. Big Canadian oilsands producers like Husky Energy Inc. and Canadian Natural Resources Ltd. posted first quarter profits.
Investors appear to have firmly accepted that OPEC will continue to curb its output levels, which analysts say has unduly caused them to become fixated on U.S. shale production.
“There’s too much focus being placed on U.S. shale—U.S. shale is rising, yes, U.S. production is rising, but it’s on an incremental basis,” he said.
Higher prices in coming years could heavily depend on decisions by OPEC, which is scheduled to meet May 25 to discuss whether it will extend its agreement to curb oil supplies.
Smith says that much of the recent slide in prices is due to disappointment that OPEC’s cut failed to lift prices.
“Now here we are moving toward the middle of the second quarter and we’re still seeing the same amount of crude being loaded on a global basis,” he said.
If crude prices fail to draw down in coming months, he said the focus will likely shift to the compliance of OPEC members under the agreement.
So far compliance has been well above what was originally expected, but some countries are exempt while other producers, like Iran, have been accused of massaging their production numbers.
“It’s apparent that these producers just don’t seem to be complying. This lack of faith seems to have dawned on the market,” Smith said.