Global oil market watchdog, International Energy Agency (IEA) in its last report indicated that oil price may have bottomed out and cited recent negotiations and agreement between OPEC and non-OPEC producers, which led to production freeze by Saudi Arabia, Russia, Qatar and Venezuela to January’s levels, as one of the key factors contributing to the above possibility. Another 11 key producers, other than Iran have either agreed to the freeze or indicated interest to join the initiative.

Oil price has recovered large in percentage terms. It is up more than 50% from its February 11th bottom around $27/barrel area.

Despite our long call to buy WTI around $32/barrel area, targeting $40-41/barrel area, reaching its initial targets and WTI still showing further strength we strongly recommend to digest IEA suggestions with a pinch of salt.

Other than this deal, IEA cited lower production in North America and slower come back of Iran in the oil market playing its part in the recovery. Here lies the catch –

• It might have been slower than expected but Iranian production likely to be higher over the period of next 12 months. Moreover, global inventory still hovering at record, more than 3 billion barrels for OECD countries.

Still that may not be the major obstacle in oil price recovery in the longer run. Its shale oil and its swing nature……add more salt.

Latest report from Baker Hughes, which details rig counts could shed some light on it.

• For the week, ending on March 18th, US rig count dropped by four, but details show number of oil rigs active, actually increased by 1, while gas rigs dropped by 5. It may be miniscule but first increase in number of active oil rigs in US.

Theory is that, US shale producers are likely to increase their production or reduce cuts as oil price moves up. While countries like Russia may not shut down its Siberia rigs as it would lead to freezing of the well, shale oil producers’ have the technology to on/off rigs at small costs.

So, Shale oil is likely to act as ceiling to the production.

As of our long call, we recommend, 60% profit bookings and carry the rest as in the near term price may spike higher.

WTI is currently trading at $41.4/barrel.