Saudi Arabia demonstrated its ability to move oil markets last week with Brent crossing $50 following comments by Oil Minister Khalid Al-Falih that the kingdom was "ready to take action", said a leading analyst.

Following the Brexit vote on June 23, oil dropped more than 20 per cent, thereby moving into a technical bear market. Within the past few weeks, however, a 22 per cent rally has taken it straight back into bullish territory, said Ole Hansen, head of commodity strategy at Saxo Bank, in a commentary.

The weakness seen during July was driven by concerns that high inventories of oil and products would further delay the rebalancing process, not least considering that we were heading towards the time of year when refinery activity normally begins to slow thereby adding additional pressure on oil storage facilities, he said.

This combined with a rising number of US oil rigs and rising production from several major Opec producers helped to support a major accumulation of short positions by hedge funds. Oil production in Iran and Saudi Arabia has also risen by 1 million barrels/day since January, reports Bloomberg.

The verbal intervention in the oil market which initially came from weaker Opec members got a strong boost when Saudi Arabia's energy minister joined in. While weaker members desperately need higher prices, Saudi Arabia's agenda was more likely to try and stabilise the market after having oil reverted to a bear market in the weeks following the Brexit vote, Hansen said.

What the Saudis actually succeeded in doing was to influence market sentiment and thereby force a reduction of what was a rapidly expanding speculative short position in the futures market. This reduction – and not the potential impact of a freeze deal – is what has triggered this recent, phenomenal rally, he said.

August and especially September tend to be challenging months for the oil market with supply rising as refinery demand slows. By preempting these developments, then, a better sentiment has been engineered.

The fear of freeze action will potentially be enough to dissuade traders from going aggressively short into September, a month that has been host to oil price declines for the past five years, said Hansen.

Having seen the price of oil return to $50 per barrel, Opec is now (if it is maintained) unlikely to do anything at the late-September meeting in Algiers. Once again, we have seen Saudi Arabia's ability to move markets supported by an impeccable timing.

It was undoubtedly Oil Minister Al-Falih's "ready to take action" comment that did the trick in helping squeeze the shorts out of the market, he said.

"We see the upside as being limited from here and expect Brent crude will find resistance in the $50 to $52 per barrel area before correcting lower back into our preferred Q3 range between $45 and $50/b," he added.  - TradeArabia News Service