Oil Surges on Potential Talks to Stabilize Crude Prices

Brent benchmark has gained 11% since August 1st, 2016

In a sign of an ongoing tussle between Middle East crude oil producers for Asian supremacy, oil prices rose on August 15th, 2016, to fresh highs, with the Brent benchmark gaining 11% since the start of the month. Oil prices were mainly driven by the heightened speculation about potential producer action to stabilize prices in an oversupplied oil market. Earlier in August 2016, some members of the Organization of the Petroleum Exporting Countries (OPEC) had called for freezing output aimed at market rebalancing, where supply has consistently outpaced demand. An informal meeting of OPEC member countries is scheduled to take place on the sidelines of the International Energy Forum in Algeria from September 26-28th, 2016. In a recent development, Saudi Arabia has said that it is prepared to discuss stabilizing the markets at informal OPEC discussions next month, while Russia said that it is open to talks for a joint output freeze if needed.

Source: Bloomberg
Source: Bloomberg

OPEC members including Venezuela, Ecuador, and Kuwait have called for an output freeze; however, the talks are expected to fail since other key OPEC members including Saudi Arabia, Iraq, and Iran have been ramping up oil exports and battling for higher market share through discounted selling prices. Iran’s crude exports to South Korea in July 2016 jumped to nearly four times the level of a year ago, and 5.9% higher than June 2016. South Korea imported 1.10 million tons of Iranian crude oil in July 2016, compared with just 286,374 tons imported in July 2015, when sanctions were still imposed on Tehran, government data showed on August 15th, 2016.

High U.S. crude oil inventory

Meanwhile, data released by the U.S. Energy Information Administration (EIA) for the week ended August 5th, 2016, shows that U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) increased by 1.1 million barrels from the previous week. At 523.6 million barrels, U.S. crude oil inventories are at historically high levels for this time of year. Recent data also show a healthy buildup of crude at the Cushing, Oklahoma delivery hub.

US Cushing crude oil inventories; Source: EIA
US Cushing crude oil inventories; Source: EIA

 U.S. rig count on the rise

U.S. drilling activity took a sharp upturn after Baker Hughes data on August 12th, 2016, showed that the number of rigs operating in the U.S. rose by 15 last week to 396, as per Bloomberg. Explorers have now added 66 rigs since June 24, led by rising activity in the Permian Basin in West Texas. After falling sharply from over 1,600 in 2014, to a low of just 316 in late May 2016, the U.S. oil rig count has steadily risen as U.S. producers have adjusted to lower prices.

Source: Baker Hughes, Bloomberg
Source: Baker Hughes, Bloomberg

The high crude oil production, swelling U.S. inventories, and the glut in the fuel market is likely to spill back into the crude sector as refiners cut back production and orders for crude as a feedstock.

Near-term outlook

After the U.S., China, and Japan published downbeat economic data in the second week of August 2016, industry experts have pointed that slower economic growth in these countries could translate into lower global demand for crude oil in 2016. The current cycle of low oil prices is expected to end by late-2017, while a re-balancing of the market would take place in 2017, according to Russian Energy Minister Alexander Novak and as reported by Bloomberg.

To make things worse for the oversupplied market, Nigeria will pump about 1.5 million barrels a day of oil in 2016, adding to the bearish sentiment for crude in August 2016.

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