Oil rally fizzles out as Canadian wildfire threat fades

[NEW YORK] Here comes Canadian oil to douse the hottest rally since 2009.

Money managers reduced bets on rising oil prices by the most in 11 months as Canadian output continued to ramp up after Alberta's wildfires. The recovery in oil prices remains "fragile" as disrupted supplies return to the market and prolong a global surplus, according to Goldman Sachs Group Inc.

"The biggest fundamental news in the market is that Canadian producers are restarting output," said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts. "I'm not counting on the other disruptions ending soon but they are already priced in." Crude tumbled for six straight days as producers returned to Alberta's oil sands after last month's wildfires that removed as much as 1.5 million barrels a day of capacity. Canadian output is expected to ramp up this month and return to normal by mid-July, the International Energy Agency said June 14. The fires last month helped whittle down a supply glut, spurring prices to a 10-month high on June 9. While Canadian output returns, disruptions in Nigeria and Libya persist.

"A lot of the rally from US$40 to US$50 was based on the fires in Canada," said Bill O'Grady, chief market strategist at Confluence Investment Management in St. Louis, which oversees $4.3 billion.

West Texas Intermediate dropped 3.7 per cent to US$48.49 a barrel on the New York Mercantile Exchange during the report week, and traded at US$48.75 at 10.25 am. London time on Monday. Prices jumped more than 95 per cent from a 12-year low in February, the biggest surge since prices more than doubled in the first half of 2009.

Investors also fled risky assets as concern mounted that the UK would vote to exit the EU in a June 23 referendum.

"Even though it doesn't mean a lot for oil it has had a major impact on risk aversion," said Michael Wittner, the New York-based head of oil-market research at Societe Generale SA. "Longer term, there's a lot to be concerned about because the disrupted barrels are coming back and inventories remain very high."

US crude supplies fell by 933,000 barrels to 531.5 million in the week ended June 10, according to the Energy Information Administration, the smallest decline in four weeks. Inventories remain about 33 per cent above the five-year seasonal average.

"Absent further sharp rises in disruptions, the market is likely to remain close to balance in June," analysts at Goldman Sachs including Damien Courvalin said in a June 15 report.

BLOOMBERG