Careful, this oil price rally isn’t as deep rooted as it looks at first glance

, Bitcoin Tips

At first glance, oil prices have rallied — a lot, but look closer and the market is telling a much different story.

At first glance, oil prices have rallied — a lot.

Look closer, however, and the market is still pricing the “lower-for-longer” mantra, much as it did at the beginning of the year.

Front-month futures for West Texas Intermediate, the U.S. benchmark, have risen 21 per cent this year, but the recovery looks very different if you focus on the longer term. The five-year-forward WTI contract fell 2.6 per cent over the same period, reflecting the view that shale oil production could rebound as prices recover, capping any rally.

oil-chart

“The markets may be getting ahead of themselves,” Michael Wittner, an oil analyst at Societe Generale SA in New York, said in a note to clients. “We still believe sustained front-month WTI at US$45 to US$50 will be self-limiting, as U.S. shale-producer spending and drilling would stabilize and perhaps recover.”

Forward contracts offer clues — although not forecasts — about where people who buy and sell oil believe prices are heading. While investors generally trade short-term contracts, long-dated futures are also important because they allow producers — notably U.S. shale companies — and consumers to lock in prices and manage their risk.

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