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The elusive oil market balance

Slow demand growth, bloated stocks and managed money are impeding the price recovery

Was May the high point-or will Opec come to the rescue? Brent futures jumped above $50 a barrel that month as unscheduled supply outages in Nigeria, Ghana and Canada took around 1.5m barrels a day of supply out of the market. Sentiment seemed to have turned. The long-sought rebalancing was underway.

The International Energy Agency (IEA) said at the time that it expected "a dramatic reduction" in global crude stocks, which would fall by around 200,000 b/d in the second half of the year. That was remarkable-in the first half of the year, they were on course to grow by 1.3m b/d.

The optimism was short-lived. By the beginning of August, Brent was on the slide again, even threatening to drop beneath $40/b. A mid-August recovery-prompted by growing chatter from Opec that it may at last be ready to intervene -has reinjected some strength.

Slowing demand growth is one problem. Consumption grew by 1.6m b/d in 1Q16 before dropping down to 1.4m b/d in Q2. In Q3 growth will fall again, to 1.2m b/d, the IEA says. Last year, demand rose by 1.8m b/d.

But 2016 has thrown up all manner of problems on the consumption side. Sluggish economic growth is a culprit. Macroeconomic concerns, from Brexit to the prospects of a rate rise from the Federal Reserve, abound.

Chinese demand has been lacklustre recently too-and its imports may fall steeply as its stock-buying surge peters out.

Supply is the other drag on prices. Opec's output soared to an eight-year high of 33.39m b/d in July, according to the IEA. Increases from Saudi Arabia-which pumped out a record 10.62m b/d-and Iraq helped raise the group's total output by 0.68m b/d compared with a year earlier. That this leap happened while production remains hamstrung in Libya and Nigeria was especially telling.

Speculators have also been putting pressure on crude prices. In early August hedge funds and other money managers accumulated the equivalent of 374m barrels in short positions in Brent and WTI-the highest number since the beginning of January. Short positions in major Brent and WTI futures and options have more than tripled since the end of May when they stood at 104m barrels. So much for sentiment. Brent lost about $7/b between early May and early August.

Until and unless Opec, alongside other producers, make a genuine, collective effort to rein in this supply, market balancing will depend on when stocks draw down. The signs aren't propitious. Commercial oil inventories swelled by 5.7m b/d in June to a record 3.09bn barrels. Any decline in crude oil stocks were off-set by a build in oil products of 15.9m barrels, which is more than four times the seasonal average. The second half of the year-expected just a few months ago to be the start of the recovery-could be much bumpier for prices than anyone wanted, or thought.

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