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 slump will not stem flow of US oil, says Opec

28 May

Despite almost a year of low oil prices, the world's biggest producers say that the North American oil boom shows no signs of abating, leading analysts to suggest that the global oversupply of oil could continue for at least another two years.

The Organisation of Petroleum Exporting Countries (Opec) will meet in Vienna next week to discuss its long-term strategy. A draft report seen by Reuters predicts that rather than contracting, oil production will continue to increase over the next two years as rival non-Opec producers – especially those in the US – expand their operations.

"Since June 2014, oil prices have experienced a significant reduction, reaching levels even lower than the crisis experienced in 2008, yet non-Opec supply is still showing some growth," the report said.

The oil price has dropped dramatically from highs of $115 a barrel in June 2014 to less than $44 a barrel in January this year. The lower prices emerged amid a boom in shale oil from the US and a decision by Opec last November to maintain its levels of production rather than cutting output to try to bring the global oil glut under control.

Opec chose to increase its supply "in a bid to win back market share and slow higher-cost competing producers", Reuters says. But so far the strategy has not appeared to work.

"Generally speaking, for non-Opec fields already in production, even a severe low-price environment will not result in production cuts, since high-cost producers will always seek to cover a part of their operating costs," the Opec report said.

It also hinted that its strategy would be to continue to drive down the price still further. "For future non-Opec production, only expectations of an oil price environment in the long-term below the marginal cost of production may deter substantial non-Opec developments," it said.

Opec publishes details of its long-term strategy every five years. When it presented its last report in 2010, the cartel did not mention shale oil as a competitor, which "highlights the dramatic change the oil markets have undergone in the past few years," Reuters notes.

According to Opec's report global demand for oil will only start to pick up after 2018-2019.

More on the oil price

Oil price drop is 'giant tax cut for UK economy'North Sea oil fields 'close to collapse'Five consequences of the falling oil priceOil price plummets: who are the winners and losersRebound fails to calm nervesOil price plunges to four-year lowsSaudi Arabia prepares market for lower prices 

Oil price rise: is the world running short of oil?

22 May

After a year in which the oil price plummeted and the industry adjusted to a period of global oversupply, an analyst has claimed that the world is running short of oil. 

The bold claim comes after Saudi Arabia and its main Middle East Opec partners turned down Chinese requests for extra oil. 

Reuters reports that the Saudis are holding back fuel for their own refineries as demand from the world's biggest crude importer hits new records.

Saudi Arabia has previously resisted calls from Opec allies to cut production in an attempt to drive up the oil price, as it pursued a policy of low prices and high production volumes in order to undermine the profitability of the US oil industry.

Saudi's rejection of China's request for more crude may help to explain why oil prices have risen by 40 per cent this year. Chinese importers have had to look to the likes of Russia, Oman, and other non-Opec nations. 

Writing on OilPrice.Com, Leonard Brecken asks: "Why would Saudi Arabia refuse to supply China unless oil was, in fact, tight?" He says there is "growing evidence that not only are we slowly rebalancing but the world may actually be running short of oil." 

Brecken's argument is further supported by official US data showing a drawdown of 2.7m barrels from fuel stockpiles, and oil companies' suggestion that rigs left idle by the plunging oil price could come back into operation when oil moves into the 70 per barrel region.

A source with a Chinese refinery that takes Saudi oil said heavy crude was "a bit tight" in May and June. With imports of 7.4m barrels per day, China overtook the US as the world's top crude oil buyer in April. 

Oil price rises on Japanese and Australian economic news

20 May

Oil prices rose on Wednesday morning following two days of decline, as news of strong economic growth in Japan and improving consumer confidence in Australia led to renewed hope that demand for oil may begin to increase.

A combination of oversupply and diminished global demand that has brought the price of oil crashing from highs of $110 per barrel in June last year to below $44 per barrel in January.

Japan surprised markets yesterday by announcing that its economy, the third largest in the world, expanded at an annualised rate of 2.4 per cent between January and March this year. The results were significantly higher than the median market forecast, which had predicted a rise of just 1.5 per cent, Reuters reports.

"Japan is one of the major importers of crude oil and growth in this region would definitely be favourable for crude demand," Singapore-based brokerage Phillip Futures said.

In Australia, consumer sentiment "surged" in May, says Reuters, after the government unveiled a budget offering tax breaks to small businesses and the Reserve Bank of Australia set interest rates to a record low two per cent.

That, in conjunction with Japan's strong economic data, helped Brent futures to gain 76 cents to $64.78 a barrel by 10:30 BST. US crude prices also improved by 57 cents to $58.56 a barrel.

The optimistic mood was further enhanced when, at an energy conference in Kuala Lumpur, Iranian deputy oil minister Rokneddin Javadi predicted that by the end of next year the oil price would rise to $80 per barrel, OilPrice.com reports.

"From a commercial point of view, today's prices should be sustained and increase gradually," he said. "But it depends on the political situation and what's going on in the Middle East and Arabian countries."

Oil price falls on sluggish US growth

19 May

The oil price fell today as slow US economic growth and continuing high levels of production kept the market suppressed.

Brent crude was down 76 cents at $65.51 per barrel at 10am BST. The dip followed an almost 1 per cent drop yesterday after Saudi Arabia announced near-record oil export figures.

Goldman Sachs predicted that the oil price could drop lower still as the market continues to correct itself following a recovery from mid-January lows of below $44 a barrel.

"We find that the global market imbalances are in fact not solved and believe that the rally will prove self-defeating as it undermines the nascent rebalancing," the bank said in an overnight report.

The lower oil price will persist as long as supply continues to outstrip demand, the bank added.

"Our supply and demand balance points to a still well oversupplied market through 2016 despite the perception of improving fundamentals," it said.

Analysts believe that oil markets could remain oversupplied for some time as US shale gas picks up and Opec maintains its dogged stance on refusing to cut production.

Kuwait's Opec governor Nawal al-Fuzaia blamed the problem of oversupply on slow demand and a rise shale output, rather than the strong supply from Opec, CNBC reports.

But traders say that the market is being hit by high levels of output from Opec's de facto leader Saudi Arabia, which exported 7.9 million barrels per day in March, "the highest in almost a decade", Reuters says.

Oil price policy a success, says Saudi Arabia  

14 May

Saudi Arabia has hailed its policy of squeezing oil rivals a success, as high-cost producers such as the US shale gas industry have struggled to compete with the kingdom.

"There is no doubt about it, the price fall of the last several months has deterred investors away from expensive oil including US shale, deep offshore and heavy oils," a Saudi official told the Financial Times.

The frank statement offers a "rare insight" into Saudi Arabia's approach to oil strategy, the FT says. The world's largest oil exporter has previously avoided answering questions about its decision to maintain high levels of oil production – a move that many analysts suggested was intended to drive the oil price down to force rivals out of the market.

According to Opec's latest monthly oil report, Saudi Arabia increased its oil output from 10.29 million barrels per day in March to 10.31 million barrels per day in April.

On Wednesday, data from the International Energy Agency showed that the number of rigs running in the US has dropped by 60 per cent as companies have either sought to cut costs in response to lower oil prices or have simply gone out of business.

But the IEA said that it would be "premature" to suggest that Saudi Arabia and Opec had "won the battle for market share". Some high-cost areas such as Brazil have managed to maintain their own high levels of production, contributing to the oil glut that has brought prices crashing from highs of $115 a barrel last June to almost $45 in January.In the face of growing calls to find alternatives to fossil fuels, the Saudi official told the FT that "Saudi Arabia wants to extend the age of oil. We want oil to continue to be used as a major source of energy and we want to be the major producer of that energy."

Oil price fluctuates after China announces new stimulus

12 May

Oil prices rose slightly on world markets this morning after China announced a fresh economic stimulus package over the weekend, but analysts remain reluctant to declare signs of recovery after a long slump in prices.

Brent crude rose 0.5 per cent to $65.27 a barrel on London's ICE Future's exchange this morning. On the New York Mercantile Exchange, light sweet crude futures traded at $59.58, also up 0.5 per cent.

China, the world's second-largest oil consumer, announced a cut in interest rates for the third time in six months over the weekend as the government attempts to tackle a decline in the nation's once-rampant growth.

Analysts are still cagey about saying the oil price has recovering after a sharp and sustained fall which began in the summer of 2014 and has seen prices drop by more than half, the Wall Street Journal says.

Brent has appeared to rally in recent weeks – but a month-long "winning streak" was bucked last week, says the WSJ, with Brent down 1.6 per cent. Nymex crude, however, rose by 0.4 per cent last week.

The sustained slump brought more bad news for the UK's oil production sector at the weekend as North Sea oil firm Fairfield Energy announced it will decommission its Dunlin Alpha platform. The North Sea oil industry is struggling to cope with low prices, with worrying prospects for jobs in Scotland.

The BBC reports that production from all Dunlin cluster fields will shut down in mid-June. The Dunlin Alpha platform will remain "fully manned and operational" to export third-party oil into the Brent system pipeline in the meantime.

The Dunlin field is situated 300 miles north-east of Aberdeen, just a few miles from Norwegian waters. It began production in 1978, peaking at 120,000 barrels a day in 1979. The decommissioning process is expected to cost £400m.

Fairfield chief executive David Peattie said: "The Dunlin asset has now achieved maximum economic recovery.

"Taking into account the asset's lifecycle, the depressed oil price and challenging operational conditions in the North Sea, starting the decommissioning process is the most appropriate action."

Meanwhile, the US government has given Royal Dutch Shell permission to drill for oil and in the Arctic Ocean, an area estimated to have 20 per cent of the world's undiscovered oil and gas, in a major victor to the company and the wider industry. Environmental groups were quick to condemn the decision, calling it "reckless and irresponsible".

However, the low oil price will help avoid a "gold-rush" scenario, says Time magazine. The falling oil price has forced oil companies to tighten their belts and they are increasingly reluctant to invest in Arctic waters due to the high cost of exploration and drilling in the region.

This has been good news for the environment, says Norwegian foreign minister Boerge Brende. "We should be very happy that there was not a 'gold rush,'" he said. "A 'gold rush' is not positive; it's throwing oneself at resources at breakneck speed. The Arctic is a very vulnerable area where we have to go step by step."

 

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