Published: June 1, 2016 |

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The magic number was delivered to traders and investors in the oil market for a brief time on Thursday.

Oil at US$50 a barrel was the half year aim for the more optimistic players in the energy sector.

While welcomed and cherished on the market, a stronger price could also encourage further production and that scared a few players.

On Friday, U.S. crude settled down 0.3 percent at US$49.33 a barrel.

The fundamentals are still not strong enough on the demand side to get comfortable with a higher price.

A series of outages contributed to this week’s robust price.

Production is still off the market in the aftermath of the Canadian wildfires, geopolitical unrest in Nigeria and Libya has cut supply; refinery labor disputes in France and the economic meltdown happening in Venezuela has the market concerned and temporarily tight.

The psychological marker of US$50 a barrel could encourage shale producers back into the market quickly.

For many smaller US producers, this has been the break even number that might tempt players to restart production.

The fear of this happening and causing unwanted volatility is adding caution to decisions as the global market remains oversupplied at current levels.

Fundamentals on the demand side need to strengthen with a better sense of permanence before we can all rejoice.

Global oil demand is gradually rising and the market is looking forward to the US driving season in June and beyond. American consumption, especially in the summer season traditionally rises and boosts the gasoline and oil market.

Following a season of lower pump prices and rising car demand, many believe there’s no reason to doubt that the highways will be busy in months to come. US gasoline consumption for April was back to 2007 levels.

Crude stockpiles in the US are gradually declining, but the data has often surprised the market to the upside. American production has also been on the decline, the most welcomed signal of all as OPEC supporters see this strategy working.

The Baker Hughes rig count for the US continues to decline, down at 375 last week.

This time last year, the rig count in the US was at a healthy 853 throughout the country.

Global oil demand continues to rise and will do so for the foreseeable future, according to the key sources, but while global supply rises at a faster pace, the basic economics remain out of balance.

Jason Schenker, president of Prestige Economics says he agrees with the head of the International Monetary Fund, Christine Lagarde when she cautions, “weakness in Chinese manufacturing, low commodity prices, and the risk of contagion for financials,” as serious risks to the global economy.

More importantly, Schenker says the real fear is the danger of the US sinking into recession.

“As the economy lurches toward recession, equities are likely to come under significant pressure, and the dollar is likely to fall.”

Schenker says we all need to pay attention to the upcoming proposed rise in interest rates from the Federal Reserve.

This has the power “to push financial institutions to increase reserves to prevent systemic banking system problems and while this would protect the overall financial system, it also traps liquidity.”

By the end of 2016, Schenker predicts an American “recession due to restricted access to credit, a continued recession of investment, and contagion risks from a recession in oil and gas.”

As a sense of strength comes back to the oil price, American prospective producers need to be paying attention to the domestic warning signs.

OPEC has clearly demonstrated it can live with the short-term pain in order to keep market share; a topic no doubt high on the agenda as the ministers prepare for their meeting in Vienna next week.

Source: (May 30, 2016) Proactive Investors

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