Why Oil Prices May Not Move Higher
It is similar to the false March-June 2015 rally. In both cases, prices increased largely because of sentiment. As in the earlier rally, current storage volumes are too large and demand is too weak to sustain higher prices for long.
WTI prices have increased 47 percent over the past 20 days from $26.21 in mid-February to $38.50 last week (Figure 1).
Figure 1. NYMEX WTI futures prices & OVX oil-price volatility, 2015-2016. Source: EIA, CBOE, Bloomberg and Labyrinth Consulting Services, Inc. (click image to enlarge).
A year ago, WTI rose 41 percent in 35 days from $43 to almost $61 per barrel. Like today, analysts then believed that a bottom had been reached. Prices stayed around $60 for 37 days before falling to a new bottom of $38 per barrel in late August. Much lower bottoms would be found after that all the way down to almost $26 per barrel at the beginning of the present rally.
Related: Oil Fundamentals Could Cause Oil Prices To Fall, Fast.
Higher prices were unsustainable a year ago partly because crude oil inventories were more than 100 mmb (million barrels) above the 5-year average (Figure 2). Current inventory levels are 50 mmb higher than during the false rally of 2015 and are they still increasing.
Figure 2. U.S. crude oil stocks. Source: EIA and Labyrinth Consulting Services, Inc. (click image to enlarge).
International stocks reflect a similar picture. OECD inventories are at 3.1 billion barrels of liquids, 431 mmb more than the 2010-2014 average and 359 mmb above the 2015 level. Approximately one-third of OECD stocks are U.S. (1.35 billion barrels of liquids).
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