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: why the slump could result in a vicious cycle

7 October

The oil sector might be in for a wild ride, according to the boss of one of its biggest companies, Royal Dutch Shell.

On the plus side for those engaged in production, however, Ben van Beurden told a conference on Tuesday he sees "mixed" signs of oil prices recovering.

The Financial Times says he pointed in particular to ongoing evidence of a slowdown in US production and that Saudi Arabia, the de facto leader of the Opec cartel, may be willing to soften its own stance of maintaining high exports to defend market share.

But Van Beurden added that prices might stay lower for longer because US producers had been more resilient than expected in the face of the year-long price slump. Moreover, with producers cutting investment projects by hundreds of billions of dollars in aggregate there may be an eventual "spike" in prices rather than stability.

Essentially, he is concerned that US producers and those elsewhere might hold production high until a breaking point that precipitates a full-on output collapse.

"This could cause prices to spike upwards, starting a new cycle of strong production growth in US shale oil", leading inevitably to another bust further down the line, Van Beurden said. He called on Opec to help ensure market "balance" instead.

Oil rose on Tuesday, as evidence that the US production slowdown is bringing down its domestic reserves bolstered confidence that oversupply is easing. Reuters adds that the Energy Information Administration also predicted global oil demand will rise by the most in six years in 2016.

But supply is still thought to be around one billion barrels a day above consumption - and even at the month-long high of more than $52.50, international benchmark Brent crude remains at less than half the level of a year ago.

While many are now increasingly convinced a bottom has been reached, there are few expecting prices to rise substantially before the end of the year and many analysts reckon there will be more bumps in the road.

Oil price boosted in US by slump in petrol production

06 October

The oil price enjoyed a boost in the US yesterday with increased domestic petrol demand causing prices to rise. But the limited recovery was capped by Saudi Arabia's decision on Sunday to slash prices again, says the Wall Street Journal.

US crude closed up 72 cents (1.6 per cent) at $46.26 a barrel while the international benchmark, Brent rose $1.20, (2.4 per cent) to $49.95 a barrel. Petrol prices enjoyed the biggest surge, closing up 4.39 cents (3.3 per cent) at $1.3853 a gallon.

The upsurge was largely caused by a drop in petrol supplies in America's Midwest, where several refineries suffered seasonal outages for maintenance, and a bigger cut in the amount of oil the US is producing than had been expected.

CNBC says commodities traders were also encouraged because Russia has now said it is willing to meet Opec to discuss the oil market. Rising share prices on US markets and a "softer" dollar helped too, the broadcaster says.

Russia has so far been reluctant to reduce its output to help boost global prices but the news that it is willing to at least meet other major producers has increased hopes in the US that it will change its tune.

However, the WSJ warns that the long-lasting slump in oil prices globally is "likely to persist into next year", even though demand has climbed and US production is showing a downward trend.

Production may be down, but not to the extent that many observers had expected, reports the newspaper.

It had been thought that spending cuts by oil firms would seriously reduce the amount of oil produced domestically – but output has been "more resilient than many expected" thanks to more efficient drilling and other cost savings, the WSJ says.

Oil price: hurricane fears put market in a spin

2 October

Oil prices rose strongly in early US trading yesterday but fell back later on as fears that Hurricane Joaquin might batter the eastern seaboard of the US subsided.

The Wall Street Journal says the commodity rose as much as four per cent at one point, with traders citing among other things the potential refinery disruption and oil "shortages" that could follow. But the rally reversed later in the day, as updated forecasts suggested the storm was "more likely to head out to sea and miss most of the east coast".

An afternoon sell-off was also influenced by US manufacturing data that showed more modest expansion than at any point in the past two years. Some analysts believe the figures could serve to weigh on demand. It is the latest bearish indicator on consumption amid concern over the slowdown in China, which continues to undermine hopes that the global oil glut might be beginning to turn.

International benchmark Brent crude fell back below $48 a barrel at the end of New York trading, with a modest increase this morning, putting it back slightly above this low threshold in London. US benchmark West Texas Intermediate is currently rising more strongly and is closing in on $46 a barrel, squeezing the spread between the two.

At present levels, oil production remains largely unprofitable, but there is a growing sense that at least prices may have found a bottom and will not fall further. Neil Atkinson, head of analysis at Lloyd's List Intelligence, told CNBC that "because the Brent and WTI price have both been stuck in the mid to upper $40s since about the beginning of August", with the exception of Black Monday, this was beginning to look like a firm floor.

"We've got falling supply from the non-Opec group of countries, rising demand growth from around the world, not least of course from the United States – a bit of uncertainty about China," he said. "So we may well see [that] this rebalancing of the oil market, which people have been looking forward to for some time, might now finally be underway."

Oil price rallies 'will be short lived'

1 October

Official figures show that the current slump in production profitability has decreased US oil output, but this has not been enough to help lift oil prices which continued to languish yesterday.

The latest report from the US Energy Information Administration reveals that US drillers produced 9.1 million barrels a day last week, notes MarketWatch, down around 40,000 on the week before from highs of 9.6 million earlier this year. Estimates suggest that output will fall to 8.9 million barrels a day by the end of the year (see below).

In spite of this, oil reserves in the US grew as the refinery maintenance season kicked in, reducing the amount of oil being processed. Production will need to fall a lot further before it begins to make a big difference to prices.

The global picture looks equally uncertain for producers. World oil demand rose by 2.3 million barrels in the first six months of this year following the sharp drop in prices, Reuters notes. Estimates still put oversupply at around one million barrels a day, with oil exports from Opec countries and Russia, in particular, remaining high.

Add to this picture an economic slowdown in key markets such as China, as well as a potential surge in exports from Iran after international sanctions are lifted later this year or early next, and it is easy to see why most analysts are predicting the supply glut will not lift until the second half of next year at the very earliest.

International benchmark Brent crude fell slightly yesterday and then rose overnight buoyed by the positive global demand figures, confirming predictions of a "choppy and sideways" trend. 

At less than $49 a barrel, prices are still painful for most producers and down around 15 per cent for the year to date. The US benchmark West Texas Intermediate settled at a little more than $45 yesterday, a 24 per cent fall for the past quarter alone.

Tariq Zahir, managing member at Tyche Capital Advisors, explained to MarketWatch that while US production fell it did so only "very slightly". He added that "bottom line, worldwide supplies are increasing" and said that in "the days and weeks to come, we will see further [supply] builds and [the] rallies we have may be short lived".

Oil price predictions: 'choppy and sideways'

30 September

Oil prices rose yesterday – and then dipped again overnight – in response to mixed messages on supply from the latest data on US stockpiles. Analysts warn that an overhang in the market looks like a long-term prospect, adding that trading is likely to remain "choppy and sideways".

International benchmark Brent crude settled above $48 on the New York Mercantile exchange, but fell back below this threshold overnight in an Asian session that was preceded by the publication of the latest inventory data from the American Petroleum Institute (this broadly confirmed that US oil reserves are continuing to rise). Reuters says that the report shows a surge in US stockpiles of 4.6 million barrels, a figure well above the consensus forecast of 102,000 barrels.

The figures, however, also point to a drawdown of nearly 1.2 million barrels at the Cushing, Oklahoma storage facility, the key delivery point for the main US oil futures contracts for the month ahead. This offers some confidence that the supply dynamic might be beginning to turn, which the market hopes will be confirmed by official production estimates later today.

The Wall Street Journal notes that the Energy Information Administration is due to give its latest update on US output, which has fallen from a record 9.6 million barrels a day in the spring to around 9.2 million now. Some estimate this figure could fall to 8.9 million by December as the unprofitable prices persist, bringing an end to the production turf war. This in turn should prompt the Opec cartel to begin to taper down its own high output.  

Expectations remain that the oversupply that's currently estimated at one million barrels a day will not be fully eroded until the middle of next year, not least because Iranian exports could increase as sanctions are lifted. Even then, with Deutsche Bank estimating a deficit of just 310,000 barrels a day, there's little prospect of a significant dent that could support a sizeable move in prices before the year's end.

In the short term, therefore, Brent will not break free of the near-$50 level at which it is currently rooted and at which much production makes a loss. Trading today may be more volatile than usual due to the "close of September and third-quarter trading", Reuters adds, citing Jim Ritterbusch of Ritterbusch & Associates who predicts "further choppy, sideways price action".

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