Edmonton Journal
Gary Lamphier: Recent oil price rally may soon run out of steam

Monday, April 11, 2016

Oil prices have gained more than 50 per cent since early February, when U.S. light crude bottomed out at a 12-year low of just $26.21 US per barrel.

Thanks to gradually falling U.S. output, stronger demand in China, a weaker U.S. dollar, a surprise pullback in U.S. inventories last week and hopes for a deal to freeze production this weekend at a key meeting in Doha, Qatar, sentiment has perked up.

The result? West Texas Intermediate (WTI), the benchmark grade of U.S. light crude, closed Monday at $40.36, up 64 cents on the day and a tick below its recent high of $41.52. Energy stocks have also found new life.

Toronto’s S&P/TSX Capped Energy Index, which makes up almost 20 per cent of Canada’s bellwether S&P/TSX Composite Index, rose 6.6 per cent in the first quarter. That was almost double the overall market gain, and it has continued to inch higher so far this month.

So does the rally still have legs? Could we see a move to say, $50 a barrel in the next three months? That’s the big question now, especially among those looking to lock in profits after picking up shares of companies like Crescent Point, Canadian Natural Resources, Baytex Energy and Suncor.

I’d love to think the rally will continue, naturally. So would the many beleaguered producers and drillers in the oilpatch, where few are generating positive cash flow at these levels. But I wouldn’t bet on it.

Although traders have speculated for weeks about a possible breakthrough in Doha between the Organization of Petroleum Exporting Countries (OPEC) and key non-OPEC producers, that seems like a Hail Mary pass at best.

Goldman Sachs’ analysts warned Monday that the meeting is unlikely to deliver a “bullish surprise” for saturated oil markets, CNBC reports. As a result, Goldman is sticking to its conservative price forecast of just $35 a barrel for the second quarter.

Tony Starkey, Denver-based manager of energy analysis with Bentek Oil products, a unit of London-based Platts, which tracks global energy markets, also sees oil prices struggling to sustain any upward momentum over the next few months.

“You don’t really want to see prices below $30 (a barrel), but you also don’t want them getting back up to $50 or $60 anytime soon, otherwise some of the U.S. shales producers will turn the taps back on,” he says.

“So we’re calling for prices to remain fairly ‘sticky’ here in the $40 range. A little above that or below that is our target for the remainder of the year. Our official forecast is for higher prices next year,” he adds, “but only marginally higher. We’re calling for about a $50 average price in 2017.”

Like the analysts at Goldman Sachs, Starkey is skeptical about any surprise breakthrough to cap or curb global crude output at Doha.

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