In Depth

Oil price posts two-year highs - but how long can it last?

Brent rose above $59 a barrel this week, its best third-quarter showing since 2004

Oil price could return to six-year low

13 November

After another slump yesterday to a two-and-a-half month low, analysts have warned that the oil price could be heading back to a six-year nadir reached in the summer.

International benchmark Brent crude fell back below $45 a barrel – below the temporary bottom it hit in January and the lowest level since its upward climb from $42 in late August. US benchmark West Texas Intermediate fell back below $42 a barrel.

The sharp fall continued a trend that set in after the latest reserves data for the US were published on Wednesday. These showed more inventory building as global supply continues to outstrip demand – and with reports of huge volumes of oil being shipped from the Middle East the situation is only getting worse.

"The realisation of a mega-glut is finally registering within the market," John Kilduff, analyst and partner with Again Capital, told CNBC. "I think we're probably in the midst of another leg lower here. It might not go straight down but we're on target to make new lows for the year."

Andrew Lipow, president of Lipow Oil Associates, agreed that "it certainly feels like [oil] wants to test the lows we saw earlier this year". This would imply Brent crude falling below $42 and could raise the prospect again of petrol below £1 a litre in the UK, although there would probably need to be a fall in the dollar to reach this threshold.

Even the most optimistic of analysts are predicting near-term falls and talking up "downside risks".

Michael Cohen, head of energy commodities research at Barclays, said current data is "confirming the market's bias" relating to oversupply and that risks of a warm winter dampening demand or a huge increase in Iranian exports remain. But he added that the current price is ultimately unsustainable and "oil is bottoming in this range".

The latest falls hit global stock markets, The Guardian notes, with indices across the world falling on Thursday and then overnight in Asia, led by energy stocks. This also reflects fear over a US rates hike, which in turn is boosting the dollar and putting more pressure on oil in the form of higher costs for overseas buyers.[[{"type":"media","view_mode":"content_original","fid":"86837","attributes":{"class":"media-image"}}]]

Oil price: traders 'blindsided' as oil inventories build towards 80-year high

12 November

The oil price is heading back towards the lows of last summer, having settled overnight at its lowest level for more than two months after the latest official data confirmed that the ongoing global oversupply shows no sign of abating.

International benchmark Brent crude finished the Asia trading session at a little above $45 a barrel, putting it back at levels last seen when it was trying to rebound from its nadir of near $42 a barrel in late August. Its US counterpart West Texas Intermediate also tumbled to a low not reached since the summer of less than $43 a barrel.

MarketWatch says the slide follows the release of data by the American Petroleum Institute, which showed a jump in crude oil supplies of more than six million barrels last week. After the sixth consecutive increase last week, the US energy watchdog put US crude reserves near the 80-year high reached this spring of more than 490 million barrels.

"We've gotten blindsided by the API. That's really put a negative spin on things," said Phil Flynn, a senior market analyst at Price Futures Group.

The latest surge in supply is happening in spite of consistent falls in output from US shale oil producers who are engaged in a production turf war with the Opec cartel. Now that it senses victory, there is little hint that the 12-nation bloc will loosen its grip anytime soon despite the ravages to some of its economies. Opec's de facto leader, Saudi Arabia, seems content to live off its ample cash reserves while it secures a stranglehold on supply.

Following reports earlier this week that Saudi Arabia was opening supply lines to Europe, says that Opec's fastest growing member, Iraq, has "unleashed a two-mile long, 3 million metric ton, barrage of 19 million barrel excess [oil] supply directly to US ports in November".

Unless Opec eases its policy in the future, oversupply will almost certainly roll on into next year. After securing a nuclear deal with the US earlier this year, Iran is likely to begin exporting at much higher volumes as soon as international sanctions are lifted. Small wonder, then, that the International Energy Agency reckons that oil prices will take five years to recover (see below). 

Oil price will take five years to recover – and still be below peak

11 November

The oil price will remain low and recover only slowly to around $80 a barrel by the end of the decade, the International Energy Agency predicts.

In its latest outlook report, the international watchdog cites a 20 per cent fall in exploration investment this year and further cuts announced for 2016, which would mark the first time in 25 years that annual investment has fallen twice in succession. Reuters says this will help the market to rebalance, lifting prices to $80 by 2020, from around $50 a barrel currently.

This means oil will remain well below the peak of $115 a barrel reached in the summer of 2014, but would at least return most global production to profitable levels.

Prices will not recover more strongly because of signs the 12-nation Opec cartel, led by Saudi Arabia, will continue to hold exports at high levels to "defend—and gain—market share", the Wall Street Journal adds. The latest signal that this policy remains set in is the decision by Saudi Arabia to begin supplying crude oil to Sweden and Poland, in what amounts to a direct challenge to Russia.

In fact, the IEA acknowledges that if demand fails to rise to meet this level of supply, then a "lower for longer" scenario could set in that would leave the oil price at around $50 a barrel until the end of the decade. It would then recover to around $85 by 2040.

Despite the bearish forecast, the oil price did lift slightly on Tuesday, albeit from recent lows of around $47 a barrel. The WSJ notes that international benchmark Brent crude rose by 0.5 per cent to $47.44 a barrel in Europe. It was still hovering around this level this morning, ahead of latest projections from the US energy watchdog, which is expected to show another build in crude oil reserves last week.

Oil price: 'not a good sign for November'

6 November

The oil price is not likely to rebound significantly any time soon and is set for a low November after the latest sell-off triggered by the data on reserves.

The Wall Street Journal notes that both the international benchmark Brent crude and its US counterpart West Texas Intermediate (WTI) rallied strongly earlier this week, rising by four per cent on Tuesday following news of a supply disruption in the US and Libya. Brent settled at above $50 a barrel and at its highest point since June at the end of its session in New York.

On Wednesday, however, the latest data from the US Energy Information Administration revealed a sixth straight week of increases to domestic crude inventories. CNBC adds that the supply of North Sea crude, which underpins Brent prices, is also shown to be "ample", while there are also signs that producers are increasing productivity and boosting output amid fears that demand from China could be waning.

The result was a sharp sell-off of crude futures on Wednesday, with Brent down four by per cent to $48.58 a barrel, and a further fall on Thursday to $48. Analysts also said that the discount, or 'contango', of oil from delivery over the next month is at its lowest in the 12 months from September 2014-15, at just $7 a barrel.

"What we're seeing is not a good sign for November," said Scott Shelton, an oil broker and commodities specialist at ICAP in Durham, North Carolina.

"The difficulty right now for the market is being able to lift off from the current floor that it has found," said BNP Paribas global head of commodity strategy Harry Tchilinguirian. "For that to happen, the market needs to see, at least directionally, some form of improvement, whether that translates into significantly lower production in the US or at least much stronger refinery runs."

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