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 prices: chief analyst warns that the worst is yet to come

11 February

A top oil analyst has warned that oil prices are likely to fall further this year before they recover, with West Texas Intermediate crude possibly falling below $40 a barrel in the second quarter of the year.

Tom Kloza, chief oil analyst at Oil Price Information Service, told CNBC that the "cycle has a long way to run out", adding that the spread between Brent and WTI could widen to about $10.

Following a three-day rally, Brent crude yesterday fell 3.38 per cent to finish at $56.43 a barrel, while WTI crude was down 5.68 per cent at $50.02.

The drop came after the International Energy Agency warned that a rebalancing of supply and demand "can take months, if not years, to be felt". The IEA said that, even after rebalancing, the oil market would "never be the same as what it was".

One of the biggest game changers is said to be the development of shale gas in the US.

John Kilduff, partner at New York energy hedge fund Again Capital LLC, told Reuters that the report was "a good reminder that there's still a lot of supply to come and it doesn't give much hope for the bulls who say we've hit bottom and are now on the way up".

Meanwhile, Goldman Sachs also noted that a sharp drop in US oil rig counts has helped lift crude prices off their lows in recent weeks, but would not slow production or alleviate oversupply.

Ian Taylor, chief executive of the world's biggest oil trader Vitol, said he expected a "dramatic" build in global oil stocks over the next few months amid high US production and weak demand.

Speaking at the annual International Petroleum Week industry conference in London yesterday, Taylor said production was not dropping, despite a reduction in the rig count.

Brent Crude prices have halved since June last year.

Oil price 'yo-yo' continues as traders jockey to find bottom

06 February

Oil prices have swung upwards again from their sharp losses earlier in the week, with the "yo-yoing" expected to continue.

Benchmark Brent crude futures posted their biggest one-day gain in six years last Friday, followed by a drop on Wednesday and another big swing on Thursday. The price yesterday settled up $2.41, or 4.5 per cent, at $57.57 a barrel.

US inventories published this week showed that US crude supplies had climbed to their highest levels in 80 years, rekindling worries about an oil glut.

But Reuters says a subsequent boost in oil demand from China's central bank, on top of rising violence in oil producer Libya, helped the market rebound. A defunct oilfield in Libya was raided by unidentified gunmen, leaving eleven people dead.

Analysts expect crude's "rollercoaster ride" to continue as it tries to find a bottom to a seven-month sell-off that took prices near six-year lows, says the news agency.

The Wall Street Journal says that short-term traders, who are quick to "pile into a bounce" and "just as quick to pull out on any sign of a reversal" are exacerbating the volatility.

Donald Morton, senior vice president at Herbert J Sims & Co, told the newspaper that the market was "yo-yoing" but suggested it was most likely a "sympathetic bounce" off the beating on Wednesday.

James Marshall, partner at brokerage Atlas Commodities LLC, explained: "Nobody wanted to miss coming off the lows. Nobody wanted to be that guy that watched it fall 50 per cent and then watched it rally 20 per cent and did nothing."

Despite Wednesday's drop, oil is still said to be up 17 per cent in two weeks, says Jamie McGeever, Reuters' chief European markets correspondent. "OK, it's coming from a low base," he says, "but that's still the biggest two-week rally since March 1998."

Oil price: four-day rally ends as supplies hit record levels

05 February

A four-day rally in oil prices ended yesterday as Brent crude tumbled by 6.5 per cent to $54.16 a barrel amid worries about a global oversupply.

Brent crude had settled higher again on Tuesday, bringing its four-day increase to around 19 per cent, as a slowdown in US drilling activity fuelled speculation that prices had reached a bottom.

A fall in the US dollar and an announcement from BP that it would cut spending by 13 per cent also worked to push the market higher.

But yesterday Brent dropped by $3.75, as data showed that US crude supplies had in fact climbed to their highest levels in 80 years, reports the Wall Street Journal.

The US Energy Information Administration announced that in the last week of January supplies had risen to 413.1 million barrels – a height not seen since 1930.

John Kilduff, founding partner at Again Capital in New York, described the inventory report as a "reality check" and said there is still a "dynamic of high output and shaky demand".

Capital Economics said that it expects US consumption of oil products to increase over the rest of this year as lower prices begin to have an impact, but output is "still likely to rise by more, at least for the next few months".

Brent crude rose again this morning, to more than $55 a barrel, but experts warn that it is still too soon to expect a sustained price rise.

Many said that oil's recent surge amounted to a move into a bull market, but Justin Urquhart Stewart, from Seven Investment Management, said it was the "most pathetic little bull market" he had seen in his life.

"This is a bull without horns that is wondering what to do," he told BBC Radio 4's Today programme. "This oil market is still going to be incredibly weak for some time, but it has bounced back with a baby bull."

Oil price shoots up: has market finally bottomed out?   

03 February

Oil prices rose yesterday, boosting oil and gas share prices and prompting further speculation that the market has bottomed out.

Brent crude, which has more than halved in seven months, posted its biggest one-day gain in six years on Friday. Despite a fall yesterday morning, the price increased again by $2.63 a barrel to $55.62.

Shares in FTSE 100 oil stocks, including BG Group, BP, Shell and Tullow Oil, rose sharply amid hopes that prices are beginning to recover, reports The Times.

The initial increases on Friday came after a report showed that 94 US oil rigs and 11 Canadian oil rigs were taken offline in the past week, suggesting that US output will fall.

US gas consumption has also picked up in recent weeks, indicating that demand is responding to lower prices.

"There is no doubt that investors are flooding back into energy," Ole Hansen, the head of commodity strategy at Saxo Bank, told the Times. "The market has been under so much selling pressure for so long. Investors are worried they going to lose out on a rally."

However, he added that a long-term increase was too early to call. "It could easily run out of steam and we could see prices come back down again quickly," he said.

Abdullah al-Badri, secretary general of Opec, suggested that prices had "reached a bottom" last week and predicted a rebound "very soon".

But Neil Hume, commodities editor at the Financial Times, says there are "powerful" reasons for thinking that prices have not found a floor.

One reason is that the global growth market is sluggish, with companies and households cutting back on investment and consumption. While US rig counts are falling, US domestic production is still rising, he says, and there is no sign of Opec lowering its production target, with some members even increasing their output.

Oil price drops again amid large-scale strike in US

02 February

Crude oil prices have taken another tumble after union leaders launched a large-scale strike at nine refineries in the United States.

Brent crude oil futures were trading at $51.93 a barrel at 7.33am GMT this morning, down $1.06, reports Reuters.

The fall comes a day after the United Steelworkers Union (USW) began the strike, prompted by a failure to agree a new three-year national contract with major oil companies.

"This industry is the richest in the world and can afford to make the changes we offered in bargaining," said Tom Conway, USW's international vice president of administration, in a statement.

The nationwide walkout is the first of its kind in 35 years and affects plants that together account for more than ten per cent of US refining capacity, reports the BBC.

Lead negotiator Royal Dutch Shell made five contract proposals but all have been rejected by the union, which is calling for higher annual pay increases, better healthcare coverage and a reduction in non-union contract workers.

Meanwhile, an oil and gas summit is being held today in Aberdeen, where industry leaders are expected to urge the UK government to tackle major challenges facing North Sea operators.

A global surplus has driven oil prices down, forcing oil companies to cut costs and rein in spending.

Brent crude has more than halved in price since its peak of $115 a barrel last summer, with some commentators warning that the industry is "close to collapse".

Nevertheless, there was a surge on Friday after a report showed that 94 US oil rigs and 11 Canadian oil rigs were taken offline in the past week. Forbes described it as a "violent short-covering rally" in which traders interpreted the news as a sign that the oil glut may gradually alleviate.

But traders are already cashing in on those strong price gains, says Reuters, while slowing manufacturing growth in China has also weighed on oil markets.

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