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 surges as US shale gas production falls

April 16

The oil price neared its 2015 peak this morning as traders weighed up the effect of falling US shale gas production, lower than expected oil stockpiles and the ongoing instability in Yemen.

Oversupply and a growing oil glut had hit crude prices hard in recent months, with the oil price falling from a peak of $115 per barrel in June to $45 in January. 

This morning Brent Crude was trading at $60.32, up 3.13 per cent and close to the 2015 high of $63 it reached in February. US crude rose by six per cent yesterday, setting a new peak for the year at $56.69.

According to figures released on Tuesday, oil production in North Dakota fell by 15,000 barrels per day (bpd) compared to January. And yesterday's data on US oil stocks showed that although inventories were still rising, the increase was smaller than in previous weeks.  

"US crude inventories rose only 1.3 million barrels to 483.69 million, the smallest build since the week ending Jan 2," Reuters reports. "That build was below expectations for a 4.1 million barrel rise in a Reuters survey of analysts.

The report came on the heels of a the US Energy Information Administration's (EIA) report on Monday, which said that shale production is likely to decline by 45,000 bpd to 4.98 million bpd in May. If the prediction proves accurate, it will represent the first monthly drop in shale gas production in four years.

Brent crude was up again in morning trading today, rising 1.47 per cent to $59.29 by 10:30am BST. West Texas Intermediate was also up 1.57 to $54.13.

The second factor driving up the oil price is the ongoing instability in Yemen, which some analysts believe could spill into Saudi Arabia – one of the world's largest oil producers.

Iran will submit a plan to the UN on how to resolve the crisis in Yemen today, but most analysts suggest that violence in the country will not be resolved swiftly.

Tehran has also pledged to "coordinate itself" so that its re-entry to the oil market does not hit crude prices. Bijan Zanganeh, Iran's oil minister, said that in his view Opec should cut production by at least 5 per cent to help buoy the oil price. But Saudi Arabia, the cartel's de facto leader, remains insistent that Opec should only cut supply if producers outside the group are willing to do the same, [2]Bloomberg reports.

"Opec's core Gulf producers – led by Saudi Arabia – appear to be sticking with their defence of market share," the International Energy Agency said.

Oil price up after Saudi says global demand will rise

13 April

The oil price rose this morning after a senior Saudi energy official said global daily demand for oil could grow by a million barrels a day each year for the next decade.

Ibrahim al-Muhanna, an adviser to Saudi oil minister Ali al-Naimi, said the current low oil prices were a "temporary, unnatural situation," reports. He predicted "continued growth in demand for the various types of energy, including oil".

Brent crude, the global benchmark was up 0.84 per cent to $58.76 at 1pm BST. West Texas Intermediate rose by 1.16 per cent to $52.24.

Saudi Arabia has been determined to maintain the supply of oil despite shrinking demand and collapsing prices. 

Yesterday's intervention by al-Muhanna will be interpreted as a call on oil-producing nations to hold their nerve until prices rise.

"At a minimum," al-Muhanna said, "oil demand is expected to grow annually by up to one million barrels per day and world consumption is expected to increase to about 105 million barrels per day in 2025, even when taking into consideration all the energy rationalisation policies in countries all over the globe."

The oil price held steady last week amid news of the discovery of up to 100 billion barrels of oil in the UK, a $70bn merger between Shell and BG Group and a tentative nuclear deal with Iran.

Following the framework for a deal between Tehran and six world powers, the Iranian oil minister Bijan Zanganeh told Reuters that Opec would "coordinate itself" so as to ensure that Iran's return to the global oil market did not trigger a further crash.

Oil price rallies after yesterday's steep fall

April 8

The oil price climbed by more than 2 per cent this morning after news of a huge build-up of US crude supplies led to oil's biggest one-day loss in two months yesterday.

Despite the partial recovery, analysts said that market sentiment remained weak and by lunchtime today the price had begun to slip again.

At 2pm BST, Brent crude had gained $1.11 to reach $56.66 a barrel, while US crude was up 66 cents at $51.08. Both benchmarks dropped by about $3.50 yesterday.

"Brent fell to the bottom of its $55 to $60 trading range yesterday," said Carsten Fritsch, senior oil and commodities analyst at Commerzbank. "Huge volatility has been the name of the game in the past few days."

Data released yesterday revealed that US crude stockpiles reached an all-time high of 482.4 million barrels last week, CNBC reports. That represents a rise of 10.95-million barrels – the biggest weekly gain seen in the US in 14 years – when analysts had been expecting a rise of 3.4 million barrels.

Saudi Arabia's oil production of 10.3 million barrels a day in March also served to depress the oil price.

Yesterday's data reinforced concerns that the global oversupply that forced the oil price down to six-year lows earlier in the year has not been redressed, the Wall Street Journal says. The news countered predictions from earlier in the year that supplies would begin to decrease.

"There's simply not a shortage at all," said Kyle Cooper, an analyst at IAF Advisors in Houston. "There's a big glut, and that glut remains intact."

Oil price drop prompts £47bn Shell bid for BG Group 

April 08

The "mega deal is back", The Guardian trumpeted this morning after Royal Dutch Shell announced it had agreed to buy oil and gas exploration firm BG Group for £47bn.

As the oil price continues to languish at little more than half the figure it reached last summer, the two firms said they had reached a deal in which Shell would pay a mix of cash and shares that values each BG share at around £13.50.

The deal could produce a company worth more than £200bn, which could "close the gap" on the world's biggest oil company, the American firm ExxonMobil, Reuters said. It would be one of the biggest mergers of 2015 and the first big oil merger in decades.

In the late 1990s, when oil priced crashed to below $20 a barrel, a number of high-profile oil companies merged: Texaco merged with Chevron, Exxon acquired Mobil, and Texaco and BP bought Amoco.

The same "core logic" underpins Shell's move on BG, said Stephen Bartholomeusz in The Australian. "With both oil prices and share prices depressed by the plunge in the price from $115 a barrel to below $60 a barrel, it is far cheaper to acquire a company and its oil and gas reserves than it is to successfully explore and develop them," Bartholomeusz said.

The deal comes at an "uncertain time" for oil and gas companies, the BBC reports. Oil and gas prices have fallen by 50 per cent in the past six months and analysts have warned that investment in exploration in the North Sea has all but disappeared.

Some commentators suggested that the Shell-BG deal could be just the beginning of a round of mergers and acquisitions.

"The deal between Royal Dutch Shell and BG Group will prompt sector consolidation," Marc Kimsey, senior trader at Accendo Markets, said in a note this morning. "The decline in oil price over the past year has battered some stocks which are clearly now looking attractive.”

Over the last year, BG shares fell 30 per cent, while shares in Tullow Oil have fallen 65 per cent, Premier Oil decreased by 55 per cent and Petrofac fell by 20 per cent, Kimsey noted.

"By comparison, sector behemoths BP and Royal Dutch Shell have only shed 10 per cent over the same period, leaving them in the position of predator rather than prey.”

The news caused a big spike in BG shares, up 42 per cent this morning at £13. Shell shares opened down 2.9 per cent at £21.45.

Oil price falls amid Iran nuclear deal speculation

March 31

Oil prices have fallen amid expectations of a deal on Iran's nuclear programme.

Brent crude oil futures slipped below $55 a barrel as speculation grew that a last-minute deal over Iran's nuclear programme would be reached at Lausanne's Beau-Rivage Palace hotel. Such a deal could open the way for more Iranian crude to come into world markets.

Brent crude for May delivery LCOc1 was down 31 cents at $54.80 a barrel this morning, reports Reuters. US crude for May delivery CLc1 was trading 53 cents lower at $47.07 a barrel.

A German official at the talks between Iran and six world powers (Britain, China, France, Germany, Russia and the US) says that although there is no agreement yet, one is possible "if there is good will on all sides".

As Michael Hewson, chief markets analyst at CMC Markets, explains, this could have significant impact on the oil trade. "If you get an agreement, there is the likelihood of Iranian oil being allowed to hit an already oversupplied oil market and drive prices lower," he said.

Britain says key issues still need to be resolved at the talks but agrees with delegates from Tehran and Moscow that there is "a broad framework of understanding". Foreign Secretary Philip Hammond tells the BBC: "We hope to get there during the day."

Oil price drop 'won't affect growth of renewables'

March 31

The falling oil price will do "little to derail" the growth of the renewable energy sector, according to analysts at Citigroup, who say the "long-term outlook for renewables will only get brighter".

The bank's researchers concluded that renewable energy would be "seriously threatened" only if the oil price dropped to the range of $20 to $30 a barrel.

Brent crude bottomed out just above $50 a barrel at the beginning of this year, and after climbing back towards $65 is now trading at about $55 – half its price in June 2014.

Even so, Citibank says that "the underlying drivers of renewable energy adoption – policy, increasing competitiveness and energy security – point to the continued long term growth" [of renewables]. The UK plans to generate 15 per cent of its energy from renewable sources by 2020.

Bloomberg reports that Goldman Sachs and Deutsche Bank "also expect renewable energy to shrug off crude's decline" and forecast ongoing investment in wind and solar projects. "Slumping oil prices may even increase demand for clean power, especially if fossil fuel companies curtail production," it suggests.

Some analysts expect that oil producers will reduce their output in order to increase demand and drive up the oil price, but Opec has so far resisted calls for cuts.

One reason why renewable energy has remained competitive is that it too is becoming cheaper, the Financial Times says. The cost of solar panels has dropped significantly, leading to a 50 per cent drop in the cost of solar electricity since 2010.

"Only four years ago, solar power didn't make sense, because it was not competitive," says Paddy Padmanathan, president and chief executive of Saudi Arabia's ACWA Power, one of the region's biggest green energy developers. "In the past 18 months, there has been a big change."

Even in the oil-rich Middle East, renewable energy is gaining a foothold. Jordan, for example, has announced that it plans to generate ten per cent of its energy from renewables by 2020.

And in the next few years, work will begin on more than £1.8 billion worth of solar energy projects in the region, the Middle East Solar Industry Association says, generating 1,800 megawatts of electricity. Last year, solar energy contributed just 300 megawatts.

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