By Fatma Babayeva
Oil prices broke the new record since the beginning of 2016 when cost of a barrel dipped to $27. Brent prices hit above $51 a barrel on June 7-8.
Price of Brent crude contracts surged to $51.02 on June 7, which was up by 0.93 percent compared to a day before.
Cost of August futures of Brent Crude rose by 0.06 percent to $51.47 per barrel in London ICE on June 8 while the price of July futures of WTI crude in New York Mercantile Exchange (NYMEX) increased by 0.2 percent to $50.46 per barrel on the same day.
In the meantime, price of the Azeri LT CIF produced at the Azeri-Chirag-Guneshli block of oil and gas fields reached to $50.72 per barrel on June 7, which was $0.75 more compared to the price of the previous day.
OPEC oil basket's price also experienced a surge by hitting $46 per barrel on June 6.
Some energy experts previously suggested that the global oil market is rebalancing. However, it is not clear whether the oil glut problem is finally finding its solution or it is a false signal caused by the supply disruptions in some oil producing countries like Nigeria, Canada, Venezuela and Libya, as well as, slowdown in U.S. shale production.
The drive towards balancing the market hinges on rising demand growth and the reduced supply from non-OPEC producers not least in the North America, head of the commodity strategy at Saxo Bank Ole Hansen told Trend on June 6.
The Vienna meeting of OPEC came and went without the usual disagreements that the global oil market has grown used to, said Hansen.
Head of the commodity strategy noted that OPEC produced an estimated 33.2 million barrels per day during April, some 1.7 million more than last year.
Talks prior to the meeting on a new production ceiling failed to materialize. Nevertheless, as the market already well on the way to balance, the need for new initiatives at this meeting was unnecessary, added the expert.
Instead, the new Saudi Energy Minister Khalid al-Falih embark on a highly successful public relations exercise, Hansen said, adding that this helped to win over several under pressure producers looking for new initiatives to boost the price even further.
With the re-balancing process well underway, courtesy of mostly involuntary supply disruptions and slowing production from high cost producers outside OPEC, this was not the time to rock the boat, emphasized the expert.
The Saudis can rightfully claim that "the pump and dump strategy" has been successful in the sense that market shares have been restored, said Hansen, adding that billion dollars worth of capex reductions from oil majors across the world will help support the price of oil return to a higher, longer-term and more sustainable level over the coming years.
However, before the market gets that far, the overhang of more than one billion barrels of global supplies and the expected resumption of supply from Canada and Nigeria will make it difficult for oil prices to rally much further in the short term, he said.
Increased hedging activity from high cost shale producers in the U.S. does indicate that an oil price rally much above $50 could be counterproductive towards the efforts of creating balance in the market, added Hansen.
Speaking about Iran, Hansen said, the country has a long-term target of producing 4.6 million barrels per day compared to 3.5 million barrels per day in April and just 2.8 million barrels during the years of sanctions.
Such a statement of Iran could have at previous meetings triggered threats of like-for-like increases from Saudi Arabia, but not this time around, he said by stressing out that Al-Khalid even promised not to shock the oil markets. This is probably in the knowledge that the new found unity could break as fast as it emerged if the price of oil reverts to lower levels, he said.
In the short term, both WTI and Brent crude maintain the established trading range between $45 and $50, according to Hansen, which leaves the risk in the short-term skewed to the downside with stabilizing production in the U.S. and the return of oil from the mentioned supply disruptions risk triggering reductions in speculative bets held by hedge funds and other speculative traders.
However, the World Bank (WB) is not positive about the future of the oil prices for the current year. The bank expects a decline on oil prices in the market in 2016.
Nevertheless, this plunge will be replaced by the rise in 2017, according to the bank’s latest global economic prospects report.
The average oil price for the current year was forecasted by the WB at $41 per barrel. In January, this figure was projected to amount to $51.
In addition, the banks expects oil prices to make up $50 per barrel in 2017.
The bank’s report also states that low and volatile oil prices have a negative impact on investments and drilling operations, particularly in the U.S. despite the efforts of the industry to reduce expenses and increase efficiency.
Oil production of non-OPEC countries is expected to decrease by almost 0.8 million barrels a day, mainly in the U.S., noted the bank’s analysts referring to the IEA data.
Yet, with the notable exception of Canada and Russia, oil output of the most petroleum producing countries is forecasted to experience some reduction by the bank’s experts.
All this should result in equilibrium price, read the report. However, the bank’s analysts does not exclude that market developments may disprove their forecasts.
They stressed out that the main risk factor for their forecast - which could cause oil prices grow - is the contingency of the agreement on the production freezing by the major oil producers.
Meanwhile, the U.S. Energy Information Administration (EIA) forecasts in its recent short-term energy outlook that Brent oil prices will average $43 a barrel in 2016 and $52 a barrel in 2017.
These figures are respectively $3 a barrel and $1 a barrel higher than forecast in last month's outlook.
WTI oil prices are forecast by EIA to be slightly lower than Brent in 2016 and to be the same as Brent in 2017.
The agency’s estimates show that Brent oil spot prices averaged $47 a barrel in May, a $5 a barrel increase from April.
The U.S. oil production is forecast by EIA to average 8.6 million barrels per day in 2016 and 8.2 million barrels per day in 2017.
In 2015, the U.S. oil production averaged 9.4 million barrels per day, according to the EIA's outlook.
EIA underlined that the country's oil production for May 2016 averaged 8.7 million barrels per day, which is more than 0.2 million barrels per day below the April 2016 level, and approximately one million barrels per day below the 9.7 million barrels per day level reached in April 2015.
In the background of the forecasted decline in global oil supplies, Saudi Arabia also said during the OPEC’s Vienna meeting that they are not going to flood the market with oil.
On June 6, Saudi Arabia approved the plan on new economic reforms which aimed to reduce the country’s reliance on oil revenues. Saudis will keep the same level of the crude production at 12.5 million barrels a day until 2020, according to the given plan.
Earlier, Saudi Arabia’s state oil company cut oil prices for Europe on June 5, as with the surging oil exports from Iran heat up the competition on the global market.
In response, Iranian side accused its neighbors of taking away its customers by offering cheaper oil.
Iran strives to bring its oil production and export to the pre-sanctions levels by the end of this summer in the longest, which is respectively 4 million and 2.2 million barrels per day.
Current oil output of Iran equals to 3.82 million barrels per day.
The developments in the global oil market always make it hard to forecast the future prices. It will be interesting to wait and see what price the future will bring.
Fatma Babayeva is AzerNews’ staff journalist, follow her on Twitter: @Fatma_Babayeva
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