Azernews.Az

By Fatma Babayeva

Due to the recent incidents happening in some oil producing countries such as wildfires in Canada and attack by unknown gunmen to the oil platform in Nigeria, oil prices experience increase in the global market as a result of supply outages alleviating glut in the market.

Ole Hansen, Head of commodity strategy at Saxo Bank believes that the main reason for the current increase observed in the oil prices is obviously the wildfire erupted in Canada that keeps spreading and is out of control now.

"The reduction in oil output of Canada led to the decrease in its oil imports to the U.S.," he told the Trend news agency on May 10 adding that it will facilitate the slowdown in inventories over the coming weeks and months. It can be considered as a positive sign. Imports to the Gulf of Mexico can be increased in this context.

However, it will not have a positive impact in the long-term as the fire will be put out, and the production will return to the previous levels sooner or later, said Hansen.

Wildfires in Canada's oil-rich Alberta province have knocked off some 1.6 million barrels a day from the market. Several companies including Suncor, BP, and Phillips 66 have declared force majeure on Canadian crude.

In addition to the fall in Canadian oil production, the output of the Africa’s largest oil exporter Nigeria also declined recently as unknown gunmen attacked an oil platform belonging to the U.S. Chevron oil company. This platform is located in the Delta of Niger River.

As a result, oil production in Nigeria decreased to its lowest level over the last 22 years, according to Reuters.

By commenting on the wildfire in Canada, The U.S. JP Morgan bank said in its weekly Oil Market report that it is yet to directly affect oil production.

With the precautionary shut-ins already totaling around 1 million barrels per day and unconfirmed reports that the Enbridge pipeline is closed, the outage could become more pronounced, the analysts of the bank said by emphasizing that the broader question on how quickly the region can recover and how easily normal operations can be resumed may pose staffing issues for operators in the coming weeks.

Analysts of the bank believe that if the production outage continues for a prolonged duration, the U.S. crude inventories will need to draw down. In addition, the current WTI spread of $0.65 per barrel on the front-month will likely strengthen and outright WTI prices may also lift temporarily to above $50 per barrel.

However, the main beneficiary from such a development would be the regional crude spreads, they wrote by forecasting WTI average price to amount to $40.41 per barrel in 2016 and $52 per barrel in 2017. In addition, Brent prices are forecasted to average $41.05 per barrel in 2016 and $52 per barrel in 2017 by the bank.

In the meantime, some agencies and institutions revised their forecasts for the oil prices. The Short-Term Energy Outlook revealed by the U.S. Energy Information Administration forecasts Brent crude prices to average $41 per barrel during 2016 and $51 per barrel during 2017, which is respectively $6 and $10 per barrel higher compared to the agency’s forecasts given last month.

Meanwhile, EIA forecasts WTI crude prices to average slightly less than Brent in 2016 ($40.32) and to be the same as Brent in 2017.

According to the agency’s outlook, the highest prices for Brent in 2016 and 2017 will be observed during the last quarters of the given years - $44.02 per barrel and $56.94 per barrel respectively. The prices for WTI during the mentioned timeframe will be equal to prices of Brent crude.

The oil production in the U.S. is projected by the EIA to average 8.6 million barrels per day in 2016 and 8.2 million barrels per day in 2017. The country's production averaged 9.4 million barrels per day in 2015, according to the agency’s projections.

EIA estimates that crude output during April 2016 averaged 9 million barrels per day, which is 0.1 million barrels per day less than March 2016, and 0.7 million barrels per day less than April 2015 (9.7 million barrels per day).

What’s more, Oil Minister of Saudi Arabia Ali al-Naimi has also been replaced recently. By commenting on new appointment, Hansen said that not much is going to change in Saudis' policy.

"They will still be quite hawkish, still looking to favor their market share over the prices, which in its turn, will not lead to any major change in the near-term, he emphasized.

Jason Tuvey, Middle East Economist at British economic research and consulting company Capital Economics believes that the change of the minister will not lead to a drastic change in the Kingdom's oil strategy. After all, his successor was the chief executive at Saudi Aramco company in late-2014 and thus, a key architect of Saudi Arabia's decision not to return to its traditional role as the swing producer in the market and cut oil output in order to support prices.

On May 7, King Salman of Saudi Arabia announced a major government reshuffle and re-organization of key ministries. Oil minister Ali al-Naimi was replaced by former health minister Khaled al-Faleh.

Now, Saudi Arabia may take even a harder stance in the negotiations with other major oil producers who ask the Kingdom to cut oil output in the global market in order to support oil prices.

According to media reports, it was Mohammed bin Salman, rather than Al-Naimi, who derailed an agreement to freeze oil output during the failed Doha meeting that took place last month by insisting that Iran should also be involved, added Turvey.

The mentioned Doha meeting ended without any agreement on freezing oil production of the oil producing countries as Saudi Arabia surprised the participants by reasserting a demand that Iran also should put a cap on its oil production. However, Iran who strives to bring its production to the pre-sanctions' level refused to join oil production freezing act and even did not attend the gathering.

The next OPEC meeting is scheduled for June where the oil output freeze will be discussed once again.

The cartel cannot fulfill its functions anymore. Recently, Russia’s oil giant Rosneft’s head Igor Sechin said that OPEC has practically died as a single entity, the times when this organization could determine the functioning terms for the global oil market should be forgotten, reported Reuters.

At the present, a number of factors impede the possibility for any cartel to dictate its will on the market, he stressed.

Today, Saudi Arabia prefers to bear low oil prices rather than losing market share as lifting cost of a barrel is lower in this country compared to how much other oil producers spend to produce a barrel.

The kingdom is simply taking a long-term view in the market by believing that it can afford to keep oil output high and prices low in order to squeeze out high-cost producers, Tuvey said.

Previously, Khaled al-Faleh noted that Saudi Arabia is the only country with significant spare capacity. Therefore, it should be the natural beneficiary of rising demand, the Economist reported on May 8.

However, Turner does not believe that Saudi Arabia would go so far to flood an already-oversupplied market.

In June, Saudi Arabia plans to increase prices of the Arab Light crude which it sells to Asia by $1.1 per barrel.

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Fatma Babayeva is AzerNews’ staff journalist, follow her on Twitter: @Fatma_Babayeva

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