Energy

Liam Denning is a Bloomberg Gadfly columnist covering energy, mining and commodities. He previously was the editor of the Wall Street Journal's "Heard on the Street" column. Before that, he wrote for the Financial Times' Lex column. He has also worked as an investment banker and consultant.

As long as there are eager buyers of bridges, there will be willing sellers.

Oil has rallied 8 percent over the past week or so on the pleasingly oxymoronic notion of a rekindled freeze. The big move came on Thursday when Saudi Arabia's energy minister, Khalid Al-Falih, indicated the OPEC kingpin was open to taking action to stabilize prices.

Thursday's Child Has Far to Go
Oil prices jumped higher on hopes of producers taking action to curb supply
Source: Bloomberg
Note: Intraday pricing for the 1st generic Nymex light, sweet crude oil futures contract.

The operative words there are "indicated" and "open." It is worth reading exactly what the minister said in his Q&A with the Saudi Press Agency:

We are, in Saudi Arabia, watching the market closely, and if there is a need to take any action to help the market rebalance, then we would, of course in cooperation with OPEC and major non-OPEC exporters.

Which is exactly the same position Saudi Arabia had going into the Doha freeze talks that melted away earlier this year and has been the country's position, more or less, since at least the late 1990s. In other words, nothing's really changed here.

But something else the minister said shows why Saudi Arabia's reiteration of its position helped move the market:

We’ve said before that market rebalancing is already taking place but the process of clearing crude and products inventories will take time. We are on the right track and prices should reflect that. But the large short positioning in the market has caused the oil price to undershoot.

He's certainly right about the short-sellers:

Short Order
Short positioning in Nymex crude oil futures and options has been shooting back up towards the very bearish peak reached at the start of the year
Source: Bloomberg

Coming during the same week when OPEC's president did some jawboning of his own to scare up some support for prices, the Saudi Arabian minister's comments were enough to touch off some serious short covering. Since then, others with a vital interest in an oil rally have added their voices -- almost comically in Russia's case. Only a week ago, energy minister Alexander Novak said there was no need to revive freeze talks. By Monday, though, he was coming around to the idea.

If it all sounds like a bit of a game, that's because it is. Saudi Arabia won't freeze or cut production unless fellow OPEC members like Iran and non-OPEC giants like Russia do because it would just mean giving up market share and badly needed cash flow. Al-Falih was right to say that "market rebalancing is already taking place" but he was quick to add that it would take time.

You can see what he means if you look at how U.S. commercial inventories have moved each month this year relative to the averages since 1986. First, crude oil:

The Sun Peeps Through
June's big draw in U.S. crude oil inventories offered a hopeful sign to the market
Source: Energy Information Administration, Bloomberg Gadfly analysis
Note: Change in inventories by month. Data for June and July in 2016 inferred from weekly data.

And then gasoline:

Driving Down The Glut
After January's surge, gasoline inventories have tended to drop more sharply than usual
Source: Energy Information Administration, Bloomberg Gadfly analysis
Note: Change in inventories by month. Data for June and July in 2016 inferred from weekly data.

The inventory data show tentative signs that, after an incredibly bearish winter, stocks have started to draw down more heavily compared with usual moves. The problem is that the size of the existing glut means that, like the man from Saudi Arabia said, it will take time. Adding up the moves in U.S. inventories so far this year, crude oil at the end of July was still 7.4 million barrels higher than if it had tracked the historical averages; gasoline was 25.4 million barrels higher.

As RBC Capital Markets pointed out in a recent report, it can be myopic to focus too much on U.S. oil inventories because those data come out more frequently. They highlight the fact that OECD stocks outside the U.S. are 24 million barrels lower this year than historical averages would imply.

That is a valid point but should be viewed in the context that those OECD inventories in both Europe and Asia-Pacific are reaching their highest levels in at least two decades when compared with demand:

Work To Do
OECD oil inventories outside the U.S. may be falling but the glut is enormous
Source: International Energy Agency

Go back to the start of the oil market's crash. What caught many off guard was OPEC's unwillingness at its November 2014 meeting to step in and clean up the market with a supply cut. Since then, that hope of a quick fix or divine intervention has been battered repeatedly but persists. Who can blame OPEC members if they occasionally tap into it to nudge sentiment away from the cliff edge? Equally, though, oil bulls can only blame themselves if they take such talk as anything more than just that -- talk.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Liam Denning in San Francisco at ldenning1@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net