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Saxo Bank: Crude oil rally probably run as far it could at this stage

Ole Hansen, Head of Commodity Strategy of the Saxo Bank says

Baku. 20 May. REPORT.AZ/ The crude oil rally has probably run as far it could at this stage. The rally was driven by a spectacular increase in investment demand for crude, both through ETF’s and futures. While US production and inventory levels look set to be reduced over the coming months the continued increase in production from key OPEC members such as Saudi Arabia and Iraq has ensured that the global supply glut is very slow to be reduced.

As the Head of Commodity Strategy of the Saxo Bank, Ole Hansen said to Report, in the short term (next 3-6 months) I see an increased risk of a 10 dollar correction on the basis that fundamentals have failed to support the rally. US shale oil producers which have seen production costs collapse as the industry has become oversupplied with workers and equipment are gearing up for a resumption of production should the price of WTI crude approach 65 dollars (59 currently).

According to him, longer term much depends on the level of economic growth and demand. The sharp sell-off in crude oil since last August only seem to have improved demand in the US while many of the major EM countries have so far not seen any significant pick-up. Refineries have seen very profitable margins for several months now and as a result they have maintained a strong demand for crude oil, not least in the US. If however demand for products fail to pick up we will only have succeeded in moving oil from one tank (crude) to another (gasoline).

Towards the end of the year WTI crude should recover back towards 65 USD but given the US shale industry’s ability to cut cost any recovery above this level will prove shortlived as shale production recovers unless a major geopolitical event erupts.”

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