Oil market in optimistic mode as prices surge
Abu Dhabi: Oil markets, struggling since prices crashed three years ago, are in an optimistic mood this week thanks to a substantial reduction in global inventories, analysts said.
Brent surged to a two year high of $59.02 per barrel on Monday, after trading for $55 for most of last week. On Tuesday, Brent was at $58.66 per barrel at around 3:26pm UAE time on Tuesday, down by 0.61 per cent. US crude West Texas Intermediate was at $52.12 per barrel, down by 0.19 per cent.
Oil prices are moving up due to reduction in global oil inventories due to Opec’s production cut agreement as well as due to steady economic growth and rise in geopolitical tensions, including the Kurdish independence referendum.
“Finally, the Opec and non-Opec supply cuts of 1.8 million barrels per day seem to be working, stocks are falling and the market structure has changed from contango to backwardation and price is rising,” said Spencer Welch, Director of IHS Energy in London. In contango people put oil into storage to sell later at higher price but in backwardated market there is no incentive to store oil, it loses money, he explained.
He however said it is too early for Opec to declare victory as the third quarter gives an optimistic view of oil market due to higher demand. “We need to wait until the end of the first quarter to truly see if the high stocks are back at five year average levels at which point higher prices above $55 per barrel might be sustainable.”
The rise in oil prices is likely to give a boost to shale oil production in the US. Shale production has been rapidly rising increasing since mid-2016 but the growth has eased slightly recent, according to analysts. “Higher prices will allow US producers to play the futures market, locking in profits for 2018, which will incentivise higher production. It is just a matter of time for US production to hit the magic 10 million barrels per day.”
Baker Hughes on Friday reported that the number of active US rigs drilling for oil fell for a third week in a row, down 5 to 744. The rig count is expected to go up once oil prices move up.
Oil prices also rose after Hurricane Harvey hit Texas coast last month but its impact on markets on expected to be minimal in the coming days with most of the refineries running again.
About 30 per cent of the US refining was off due to the storm but with most of the refineries running again, the figure has come down to only around 5 per cent, Welch said.
Opec member countries will meet at the end of November to take a decision whether to extend production cut agreement beyond March next year. They will also decide whether Nigeria and Libya will be included in the deal. Both Nigeria and Libya are exempt from the current agreement.
“One of the primary reasons why the oil prices have rebounded is because of Opec and its partners continuing to stick to their commitment, irrespective of the market movements,” said Mihir Kapadia, CEO and Founder of Sun Global Investments in London.
“Despite best efforts, there have been some evidence of transgressions from members which contributed to an increase in production figures, which unnerved the markets earlier, but the commitment to the compliance remains firm.”
If Opec members lose significant discipline and production spikes, we could see an increased glut which will pull down the prices back down, said Kapadia.
“Therefore it would be necessary for some sort of production understanding to be formed to anchor production in line with market demand. Only then, can we see long- term growth in prices.”
UAE Energy minister Suhail Al Mazroui expressed optimism on rebalancing of oil markets while speaking to reporters in Abu Dhabi on Monday. He said compliance among member countries continues to be good.
“There is a huge glut in the market but these (supply) reserves are declining. We still haven’t reached the average for five years. But hopefully, will reach that next year,” he said adding that UAE has cut up to 10 per cent of their exports in the last two months in accordance with the output cut pact.
( 译者：王立琦 审校：吴广慧，马佳惠 )