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‘Oil in for short term gain, long term pain’ - THE NATION

AUGUST 13, 2019

ANALYSTS on Monday said there are positive signs for the market in the weeks ahead as higher gasoline demand could stop oil’s recent slide. But in the longer-term, the oil market looks increasingly bleak.

Brent crude futures rose 0.2per cent to $58.63  on Monday, and West Texas Intermediate (WTI)  rose 0.6per cent to $54.81.

Oil may not head straight down, however. In the short-term, prices are likely to stop falling, Beveridge predicts. “With OPEC exports continuing to decline and peak driving season in full swing, we expect sizeable inventory draws in August which should be price supportive in the near term,” he wrote.

And for the moment, short interest isn’t really a problem either. “Given the asymmetry behind the geopolitical backdrop, few market participants are willing to stomach the risk profile of outright shorting the oil market,” RBC Capital Markets analyst Michael Tran wrote. Shorts are staying away because of the risk that an international incident—like in Iran— could cause prices to spike.

But the long-term outlook for oil bulls is bleak. Supply is expected to far outpace demand in 2020. The Organisation of Petroleum Exporting Countries (OPEC), which has already cut production to boost prices, will have to decide whether to cut production further to keep prices from falling more next year. Currently, supply is expected to grow by 2.2 million barrels per day, while demand could rise at just 1.2 million barrels, Bernstein analyst Neil Beveridge said. And that could end up being optimistic.

“A weaker global economy could result in downside risks to this figure.This could lead to substantial inventory builds in 2020 which could push oil back to marginal cash cost,” Beveridge wrote.

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