Fundamentals Matter

After breaking above $50 per barrel at the end of June, crude oil prices have slid approximately 20 percent to slightly above $40 per barrel. As noted in our market analysis over the past months, there has been little to no fundamental basis for the almost doubling of crude oil prices from February lows (of approximately $27 per barrel) to June highs (of approximately $51 per barrel). The rebound was started by rumours of a potential production freeze between OPEC and non-OPEC producers that never materialized. This rumor, however, was enough to trigger a short but sharp price reversal fuelled by the substantial open short interest (held by hedge funds and institutional investors) at the close of February. This price reversal was extended through the second quarter by news coverage of geopolitical events (i.e., continued outages in Libya due to the on-going civil war and Nigeria due to political unrest in the Niger River delta) as well as outages resulting from wildfires in Canada. With the Canadian wildfires now behind us and production looking to come back online in Libya and Nigeria, underlying market fundamentals once again are taking center stage.

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