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Return of the dove

Published Friday, January 22nd, 2016

The first semi-decent bout of short-covering for about two months has finally arrived and it was possibly due to four factors: cold weather, international tensions, talks of cutting global production and talks of global stimulus detailed below.

Cold weather: both sides of the Atlantic are braced for freezing temperatures following a very mild December. This was highlighted in the 1 million bbl draw in US distillate inventories which helped NYMEX Heating Oil settle 318 points up on the day. Forecasts, however, do not see a prolonged cold spell so weather-related price support is expected to be short-lived.

International tensions: geopolitical premium has been non-existent for the last year or so but rising tension coupled with other seemingly bullish developments provides another good excuse for shorts to take profit. It was certainly the case yesterday as an independent inquiry into the killing of a former Russian spy in Britain concluded that President Putin “probably” approved the murder. As such UK-Russian diplomatic relations are at rock bottom. Add in the attack by IS militants on oil installation in Libya, Saudi-led air strikes on oil storage facilities in Yemen and reports that Islamist gunmen have reportedly killed 17 people in a restaurant attack in Somalia and you will not be surprised to see Brent closing $1.37/bbl higher, WTI $1.18/bbl up and RBOB 135 points stronger.

Global oil production cut: at this stage no agreement between OPEC members or OPEC/non-OPEC producers is imminent but calls for production cuts are getting louder. It all started off by Oman saying on Monday that it is ready to cut oil output by 5-10%, continued with Algeria saying that OPEC and non-OPEC producers must talk on reducing output whilst Venezuela is requesting an emergency meeting in February between the two producer groups. The Azeri leader also expressed its willingness to work with OPEC on production issues.

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Posted by Tamas Varga

Tamas Varga has been in the oil industry since 1992 and with PVM for 18 years. During his time in the industry he has gathered a range of experience in the oil markets. At PVM Tamas is in charge of data collection and analysis.