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Weekly Investment: Oil is in a bottoming process, but expect it to be choppy

With Brent trading back above $40, and WTI above $38, some commentators are now suggesting at least the beginnings of a fundamental recovery is taking place

Claude-Henri Chavanon

Published: Updated:

With Brent trading back above $40, and WTI above $38, some commentators (for instance the International Energy Agency) are now suggesting at least the beginnings of a fundamental recovery is taking place in the oil markets.

While we would of course hope that this is true, and doubtless helped by production problems in Nigeria and elsewhere, the market logic regarding US shale production is almost certainly on shaky ground. The US rig count is indeed well down, yet a large percentage of the extra 4.5-5.0 million b/d of production that came on during the previous four or five years is still in place.

We expect (very flexible) shale capacity would now come back on if West Texas traded much above $40 - and definitely towards $45, and that the latter kind of price would be attractive for producers to make hedge/forward sales. This is the definition of the upper part of the trading range we envisage. While we would be very surprised to see $26 (basis WTI) successfully broken, we still expect a very ‘choppy’ bottoming process during the months to come.

The good news, if we are correct, is that it is a bottoming process.

We would utilize any correction back towards $30 or below as an excellent opportunity to buy oil-related assets, with a target of $45, with a stop-loss at $25.

In addition, any such weakening in the oil price would, we firmly believe, provide an excellent opportunity to buy MENA equities, and especially UAE equities.