Oil: Exciting Politics

Oil prices take a breather from the soaring rebound as enthusiasm grows for the upcoming gathering of oil nations. Although oil policy generates some uncertainty in the short term, market fundamentals suggest greater strength as demand grows with the recovery and the probable rebound in leisure and travel activity. The oil cycle is well advanced, but we see oil prices temporarily rising above US $ 70 by mid-year, said Norbert Rücker, Next Generation director of economics and research at Julius Baer.

Oil prices took a breather after the vertiginous rebound in recent days and returned to the range of between $ 60 and $ 65 a barrel. The supply agreement of the oil nations and their restrictions on exports by key producers has been an important factor in driving the rebalancing and normalization of the oil market, this, together with the pause of drilling of the shale business in the United States. States and the rapid recovery in demand. As the monthly meeting of the oil nations approaches later this week, the oil market gets a bit excited and the usual policy guessing attempts get more attention. The question is not “if”, but rather “to what extent” oil nations will ease supply restrictions. Saudi Arabia’s stance is focused, given its more cautious assessment so far and that its voluntary cut earlier this year will eventually need to be undone.

The Oil Policy: A Source Of Uncertainty

For Julius Baer’s Norbert Rücker, the pressure to act is there. Some emerging markets are starting to feel prices spike, from food to fuel, and especially the privately funded parts of the US shale business seem to be increasing activity and looking to grow production, reminding us of the inherent challenge of market share. The oil policy of oil nations is a source of uncertainty and could push oil prices in either direction in the coming days.

That being said, the fundamentals of the oil market for the next few months seem quite predictable. The economic recovery and the likely rebound in travel and leisure activity will boost oil demand and additional supplies will be needed to avoid an over-adjustment. That’s what the price rally indicates.

We still see a temporary bounce above $ 70 mid-year. However, in the long term, we are skeptical that such price levels will persist, as both oil from shale and oil from oil-producing nations should eventually return to the market.

Note: This article originally appeared at ValueWalk.  The author is Norbert Rücker, Next Generation Director of Economics and Research at Julius Baer.