A combination of timely factors drove oil through the US$60 barrier earlier this week, but the rally was short lived as crude delivery futures for June delivery dipped back below the $58 region.
“The unexpected 4.6 million barrels decline in crude oil inventories (a 1 million bbls increase was expected), and another 4.2 million bbls decline in gasoline stocks were bullish news for the oil price,” explained Jens Zimmermann, ABN AMRO global private clients equity analyst.
The inventory shortfall was driven by sharply lower oil and gasoline imports into North America. .
Oil Price Momentum
“For the first time in six months, crude oil prices moved beyond $60/bbl pushed upwards by growing optimism on the world economy and continuing signs that
Chinese oil buying has remained strong (oil imports rose 13% y-o-y in April),” added Zimmermann.
Encouraging comments from the European Central bank president also supported the price, saying that the global economic downturn has reached the bottom and that some economies are already recovering. A weakening US dollar in response to growing risk appetite provided additional support for the oil price.
North American drilling – A barometer?
During the three most severe downturns in the oil services industry (in 91/92, 98/99 and 2001/02), the North American (NA) rig count for natural gas drilling plunged by 35% – 40%. Thereafter, in response to these steep supply cuts, natural gas prices more than doubled in subsequent years. “As the NA rig count has already plunged y-o-y by 50% in the current downturn, investors believe that a natural gas price increase could also be imminent. Thus, investors have started to buy oil services and E&P stocks to anticipate the bottoming in NA drilling activity,” explained Zimmermann.
Integrated oil companies look stronger on the back of a fairly good week too. Today’s ABN AMRO research note had Chevron, BP and Royal Dutch all at a “buy” recommendation, joined by Schlumberger and Fugro in the oil service sector. Exploration and production companies have shed their “sell” status which plagued Q1, and the major publicly listed players are all rated at “hold”.
