Investors have been piling back into oil and commodity stocks in recent months, buoyed by the resurgence in prices.
Brent crude is back up to around $65 a barrel, from its lows of $50 at the start of the year.
The copper price has just enjoyed its best week since 2011, rising 6.5%, although it is up just 3% since the start of the year.
I have watched the multi-week rally with scepticism because I don’t think it’s got legs, given slowing global growth, rising Grexit fears and falling Chinese factory output. Now I find myself in illustrious company.
Barclays, Deutsche Bank and Morgan Stanley have all warned the current rally could prove short-lived.
If we are right, this could knock the already uncertain outlook for BP (LSE: BP), Royal Dutch Shell (LSE: RDSB), BHP Billiton (LSE: BLT) and Rio Tinto (LSE: RIO).
Buyer Beware
As Barclays baldly stated it: “Watch out: this rally may not last. The risks for a reversal in recent commodity price trends are growing.”
It has spotted a glut of excess oil, with inventories rising by around one million barrels a day, and a build-up of unsold crude cargoes from Angola to the North Sea. Yet at the same time, all looks rosy in the futures markets, and Barclays warns that this “disconnect” could derail investors.
Analysts at Morgan Stanley have said that rising supplies, growing shale activity and potentially higher OPEC output could all hit the price.
It warned in a note to clients: “We have growing concerns about crude fundamentals in the second half of 2015 and 2016.”
The steam has certainly gone out of the oil price surge in recent days, helped by the falling dollar, although Brent Crude still trades at around $65 a barrel.
On The Other Hand…
The banks could all be wrong, of course. Fresh stimulus and interest rate cuts in China could deliver an extra spurt of demand.
The U.S. Energy Information Administration expects US shale output to drop by 71,000 barrels per day in June to 4.97m bpd, which could reduce supply and shame my forecasting skills.
In the Middle East, anything could happen.
But oil growth demand looks set to stay low next year, according to the Energy Information Administration, with US consumption still below 2008 levels. Falling shale rig count is bottoming out and production continues to grow.
Iranian oil may soon return to market. Goldman Sachs reckons markets will remain oversupplied. The Chinese growth engine is landing.
All of these factors could spell continuing woe for investors in BP, Royal Dutch Shell, BHP Billiton and Rio Tinto, who should beware getting sucked into the rally.