Crude awakening: Beware oil’s ‘dead cat bounce’

The current recovery in oil prices could prove to be nothing more than a short-lived “dead cat bounce,” analysts have warned, pouring cold water on hopes of a sustained recovery in crude.

Aided and abetted by reports and data signalling a rise in demand and fall in supply, the price of benchmark Brent crude rebounded this week, climbing more than $2 on Tuesday and closing above $50 a barrel (at $52.30) for the first time in a month.

The surge in prices prompted hopes that the oil price could be recovering finally after a sharp fall from $114 a barrel last June on the back of a glut in supply and lack of demand. On Wednesday, however, a damper was put on proceedings after U.S. data showed a surprise build-up in U.S. crude inventories, prompting Brent to pare gains and close at $51.33.

While prices remained steady on Thursday, at $51.41 for Brent and $47.90 for West Texas Intermediate (WTI, or U.S. crude), analysts said the current rally could be nothing more than a “dead cat bounce” – a temporary recovery from a prolonged downturn.

“I hate to rain on everyone’s parade but I am the pessimist in the group. If WTI does get back above $50 it’ll be quite short-lived and I do think it’ll break below $40 a barrel on the next leg down so I think we’ve got some bottom-fishing left,” Warren Gilman, chairman and chief executive of CEF Holdings told CNBC Thursday.

“The fact of the matter is that we just still have too much supply and even though U.S. production looks like it’s starting to turn the corner and come down, global supply is still growing,” he told CNBC’s Capital Connection. “So we still have a problem of growing supply and, in order to cut that, we need prices to fall further.”

Pessimism or realism?

Gilman was not alone in his skepticism of the oil rally, with other oil analysts also ambivalent about the move higher.

In his regular oil blog posting on Wednesday, oil and gas industry expert Malcolm Graham-Wood cautioned that while “interesting things” were going on in the oil market in terms of data, “one swallow does not a summer make” and that it was “clutching at straws” to leap to conclusions about the oil rally continuing apace.

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As caution reigns and the oil price hovers around the $50-mark, attention has focused on what major oil producers might do next to support prices.

oil barrels

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The 12-member Organization of Petroleum-Exporting Countries (OPEC), led by major oil exporter Saudi Arabia, decided last year to not cut production in a bid to put pressure on U.S. shale oil producers, whose production costs are higher.

The strategy appears to have worked with many in the U.S. cutting, if not shutting down, production and delaying drilling projects. OPEC has held talks with a non-member oil producer Russia in recent days, however, prompting speculation that the two entities could jointly cut production in a bid to support oil prices.

Fight to the death

OPEC, which includes several Middle Eastern and African oil-producing countries as well as Venezuela (which has repeatedly called for a cut in production as its government struggles with lower oil revenues) is meeting in December.

The group has repeatedly refused to cut — and has often exceeded — its production ceiling of 30 million barrels a day, however, showing that it is ready for a fight to defend its market share from shale oil producing newcomers in the west.

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Despite the damage that lower oil prices are doing on the budgets of oil-producing countries, including Saudi Arabia which is cutting government spending amid falling oil prices, Gilman did not expect any supply response from OPEC at the end of the year.

“I would expect that at that point they would finally see that their strategy is working to see a drop in production in non-OPEC countries and it will be way too soon for a production response from Saudi,” he believed.

“They’ve got to maintain their supply discipline — notwithstanding the impact it’s going to have on their fiscal reserves — in order to, ultimately, drive some of this supply out of the market in the medium to long-term, not just for the next few months.”