Finance

Oil’s recent outperformance can be traced back to one thing

oil well sunset rigReuters

Oil’s had a pretty good year.

The commodity’s seen a nice rally that’s approaching six-month highs in light of a weaker US dollar, stronger economic data from China, decreasing non-OPEC production, and a continued rise in demand.

Since their February lows, WTI crude has rallied by about 75%, while Brent has rallied by about 57%.

And as of 12:38 p.m. EST, the former is around $46.11 per barrel, while the latter is around $47.41 per barrel.

Until early April, oil’s prices closely tracked those of other commodities, such as copper.

But since then, Capital Economics’ Tom Pugh observed that there’s been a bit of a divergence, which he attributed to various, ongoing supply outages.

“The recent divergence can probably be explained by wildfires in Canada and pipeline bombings in Nigeria, which have knocked over 1.5 million barrels per day off global crude oil output, and effectively brought the market back into balance,” argued Pugh in a note to clients.

“Meanwhile, the price of copper has fallen back following concerns about the state of demand in China, below average amounts of mine disruptions and high levels of stocks,” he added.

UntitledCapital Economics

Notably, the commodity strategy team at RBC Capital Markets led by Helima Croft also touched on the global outages. They noted that although the large-scale disruption issue seems to be temporary, Nigeria’s likely to see more outages in the future.

And, for what it’s worth, the team suggested that if disruptions continue, then they could start to attract a bit more attention.

“The oil market has not priced in a supply disruption risk premium over the past 18 months given that global inventories are ample enough to weather short-term hiccups; however, acute and lengthy disruptions may soon become too large to ignore,” the team added.

In any case, for what it’s worth, although 2016’s oil-price rally is great news for oil producers and investors, some analysts have recently noted that it could be “sowing seeds of its own destruction.”

“The danger is now that prices rise so much that they actually prevent the market from rebalancing,” Pugh wrote last week.

“We would not be surprised if prices continued to fall over the next few weeks and months before trending higher in the second half of 2016,” he added.

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