Exactly 24 hours ago, we explained why - in our view - the oil rally was over, and gave four key reasons: i) after the biggest documented short squeeze in history, all the "weak hands" had been blown out and any incremental covering from here on out would be far more difficult; ii) an oil OPEC freeze will have no impact coming at a time when production by many cartel members is at all time highs, iii) the Niger Delta Avengers have agreed to a ceasefire meaning up to 300kbpd in Nigerian oil production would hit market shortly, and iv) the fundamentals suggest far more supply in the future, notably out of the US shale sector much of which has reorganized with cleaner balance sheets, which in the absence of rising demand (in fact demand out of China is falling) means lower price.
Moments ago, Goldman energy analyst Damien Courvalin released a note titled "More worried about a thaw than a freeze", in which he effectively confirmed everything we said yesterday, when the sellside strategist said that the "three remaining large sources of oil supply disruptions – Nigeria, Iraq and Libya – have all shown signs of increasing output since last Wednesday", warning that "each country has the potential to move the global oil market back into surplus given our modest 230 kb/d expected deficit in 2H16" and "as a result, we reiterate our view that the oil price and fundamental recovery remains fragile."
But worst of all, if only for the headline scanning algos, and Venezuela's increasingly more desperate oil minister Eulogio Del Pino, Goldman now thinks that "while discussions of an OPEC freeze and a weakening dollar have been catalysts for the sharp reversal in oil prices this month, we believe neither will be sufficient to support prices much further. In our view, thawing relationships between parties in conflict in areas of disrupted production would be more relevant to the oil rebalancing than an OPEC freeze which would leave production at record highs and could prove counter productive if it supported prices further and incentivized activity elsewhere."
As for fundamentals, "supply continues to feature the cross currents of rising low-cost supply, declining high-cost production, and new project ramp up. In fact, marginally more bearish data recently than we had assumed suggests in our view that the recent price rally should stall."
Precisely what we said yesterday.
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