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Is $50/b Brent’s new normal?

Analysts think the worst is over and a rough floor has been established, for now

THE BREXIT-induced sell off in oil futures should be short-lived, as broader forces sustain Brent's recent strength. $50 a barrel looks to have staying power. Analysts expect Brent prices to keep rising throughout the second half of the year as OECD crude stocks deflate.

Of the six analysts surveyed by Petroleum Economist, four expected Brent prices to remain above $50/b between June and December. Two analysts (Energy Aspects and ABN Amro) see Brent reaching $65/b by the fourth quarter of this year.

Outages in May reduced global oil supply by nearly 0.8m b/d, according to the International Energy Agency (IEA). At 95.4m b/d, global crude output was 0.59m b/d lower than in the same month a year earlier - the first significant drop since 2013. Next year the IEA expects non-Opec supply to grow by 200,000 b/d, after falling by 0.9m b/d this year. But demand remains healthy, believes the agency, and will rise by 1.3m b/d in both 2016 and 2017, when it will hit 97.4m b/d.

Analysts are getting bullish. ABN Amro's year-end price forecast from June was $10/b above earlier targets. It says the real impact of spending cuts haven't yet been seen. Global spending plans for 2015-20 have been cut by over $1 trillion, or 22%, says Wood Mackenzie, a consultancy.

But the bears haven't gone away yet. Despite a strengthening physical market, financial speculators are exerting pressure on Brent prices. Hedge funds and other money managers cut their net long position in Brent and WTI futures and options contracts from a near-record 0.63bn to 0.57bn in the week to 14 June. Net-long positions for Brent futures and options contracts dropped by 17m barrels - around 4% - to 372m barrels.

The following week money managers reduced their net long positions in Brent futures and options by a further 9m barrels. That may reflect some nervousness about the global economy, following the Brexit vote; the spectre of a Federal Reserve rate cut, which would dampen oil prices; or a recent tick up in the US rig count. The last of these suggests to some that a Brent floor at $50/b isn't too many dollars away from a ceiling too.

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