Oil tumbles nearly 20% from October high but analysts expect a recovery

Just a few weeks ago, there was talk about oil hitting $100 US a barrel after crude prices hit a four-year high in October.

That's a feat that hasn't been achievedsince 2014 before the commodity market came crashing down.

But since then, oil prices have tumbled around the worldbriefly falling into bear market territory this week.

That means benchmark West Texas Intermediate (WTI) oil in New Yorkplunged more than 20 per cent at one point onTuesdayfromlast month's peakof $76.90. On Wednesday, oil was trading around$61US per barrel after prices fell for eight straight days.

Reports Wednesdayabout plans from the influentialOrganization of Petroleum Exporting Countries (OPEC) to discuss cutting oil production next year in response to increasing global inventories also didlittle to boost prices.

Even with the month long decline, however, some analysts aren't ready towrite-off the significantrecovery that's been taking place in the oil market this year.

"I think the market is kind ofgetting ahead of itself now," said Michael Loewen, commodity strategist at Scotiabank. "The narrative of an emerging recession and bear market played out.We saw what happened with the equity markets, and even in therates [bonds]markets."

"Both of those markets are starting to recover. Obviously,you're going to take your risky assets [like crude oil] with you." Crude oil futures, like many commodities,aregenerally considered riskier assets for investors compared to bonds due to price volatility.

Stock markets have beenclimbing higher since "Red October," when investors sufferedsome of thebiggest losses this year amidwild swings in equities.

Market 'spooked'

But, oil prices haven't followed suit because the prospect ofU.S. sanctions on Iran's oil exports led other big producers like Saudi Arabia, Russia and the U.S. to boostproduction in order tomake up for any shortfall in globalsupply.

"There's this misconception here that the market is completely swamped with excess supply ... We think that's a bit of a fallacy," said Michael Tran, managing director of RBC'sGlobal Energy Strategy.

"Many people in this market are quite spooked by the idea that supply is coming in a large size, and demand growth is potentially slowing."

Data from the Energy Information Administration (EIA) in the U.Son Wednesday showed that crude stockpiles grew more than forecast by 5.78 million barrels from the week before.

But, Tran saidthere is a disconnect between the physical and financial side of the oil market right now and that's bringing down the price.

"I think there's a major difference between a market that is well-supplied, and one that isover-supplied, and right now we're in the well-supplied camp," he said. "In the physical market, barrels are selling with relative ease."

Tran added that on a seasonal basis, generally inOctober andNovember, is when oil refiners shut downfor planned maintenance.

"Right now what you're seeing is a pretty heavy maintenance season playing out. So, there's less buying happening in the market," Tran said. "That's a seasonal factor, and we do ultimately think that demand will pick up through the balance of this year to the next several quarters."

Price rebound coming?

Tran expects to see oil prices back into the low $70 a barrel range by the end of this year. That's a more than eight per cent jump from the current price. He's calling for it to go even higher next year into the mid $70 range.

Not everyone is convinced that thehurdles in the oil market will clear so soon.

Karl Schamotta, chief market strategistat Cambridge Global Payments, said a combination of factors such astightening global financial conditions like higher interest rates, deleveraging in China, which isreducing the country's appetite for energy exports,and fears overtrade tensions could weigh on the market a bit longer.

"Overall, although oil demand growth is likely to weaken in the longer term, my feeling is that oil prices could rebound into the end of the year," Schamotta said.

What this means for Canada

In terms of how global oil prices will impact the Canadian energymarket, analysts said the huge discount between Canada's benchmarkcrude oil Western Canadian Select (WCS) and WTIcould start to narrow next year.

Currently, WCS is trading around$18a barrel, while WTI is at $61. A supply glut caused by a lack infrastructure such as pipelines and rail capacity to transport crude exports to key markets like the U.S.has plagued the sector.

"Ibelieve that rail is going to clear the market in by spring time ... That's when the market starts to get better," said Loewen. "Then you have EnbridgeLine 3 coming online in November2019 ... It adds 350,000 barrels per day and that has massive implications for WCS."

Schamottaadded that after the widest oil refinery shutdowns in the U.S. Midwest in at least a decade, a number of major refiners are due to restart production in the next couple of months.

"Canadian producers should begin to earn more revenue from each barrel shipped," he said.

But, Loewenwarnedthat an increase in exports does not meanthe Canadian market is "out of the woods."

"We still need another pipeline.We need a Trans Mountain expansion project or a Keystone XL to really see the fruits," Loewen said.