Saxo Bank: Oil prices may gradually recover back to levels seen earlier this year

Baku. 8 October. REPORT.AZ/ Crude oil jumped out of its trading range yesterday after weeks of sideways movement. Sentiment has been on the mend following the 30% four-day rally back in August, and since then we have seen investors, such as hedge funds and money managers, return as buyers. Report informs, Ole Sloth Hansen, Head of Commodity Strategy at Saxo Bank says.

The rally was driven by continued signs of slowing non-Opec production, not least in the US, where the seasonal slowdown in demand from refineries has so far failed to deliver the expected (price negative) rise in inventories.

While the official weekly inventory report yesterday from the US Energy Information Administration showed more than expected rise of three million barrels, the American Petroleum institute's own data yesterday showed a surprise decline of 1.23 million.

This data combined with falling inventories at Cushing, Oklahoma, the delivery hub for WTI crude oil futures, continue to point towards falling production. At a meeting in London on Tuesday, the former head of EOG Resources even said that US oil output is on the brink of a dramatic decline.

An accelerated decline would further vindicate Saudi Arabia's decision last November to go for market share and let falling prices sort out the imbalance between supply and demand. What we are seeing now is falling non-Opec supply and rising global demand, which, according to the EIA's latest short-term energy outlook, is expected to increase by the most in six years next year.

Global demand growth has recovered strongly in response to lower prices, but with supply continuing to outstrip demand, the road to normalisation is long. The renewed weakness in the third quarter was driven by an expected pick-up in exports from Iran once sanctions are finally lifted in the first quarter of 2016.

US oil production is slowing, and the Energy Information Administration (EIA) sees non-Opec output falling next year by the most since 1992. If realised, this will go a long way to stabilise the market during the second half of 2016 and should help oil prices gradually recover back to - and eventually above - levels seen earlier this year.The road to recovery will be long, which leaves the price upside for the rest of the year capped at $53/barrel on WTI and $55/b on Brent crude.