Since the Saudis lopped off the head of oil price support in December 2014, energy investors – as well as energy companies and the thousands of Canadians who work for them, or at least used to – were living through a long dark winter of Bet on Thrones proportions.
IEA for the first time sees light at the end of oil’s ‘long, dark tunnel’
Oil prices might have passed their lowest point as shrinking supplies outside OPEC and disruptions inside the group erode the worldwide surplus, the International Energy Agency said.
Continue reading.
Yet over the past month, crude has begun to shine again. The cost of benchmark West Texas Intermediate has risen by 46 percent since mid-February, finishing a week ago approaching the “psychologically important” threshold of US$40 a barrel. (Nowadays, it seems every $10 increment in the cost of oil is “psychologically important.”)
Canadian investors have reaped the benefits. To date in March, the S&P/TSX capped energy index is up more than 13 percent, taking the broader index up with it, by a lot more than five per cent. The loonie has also recovered against the greenback, at least a bit, making every snowbird’s annual sojourn more affordable.
But will this springtime for oil last?
Well, it’s easy to be pessimistic, for some reasons.
We have experienced price jumps before, only to be disappointed. (There is a rally last March, too, eventually pushing WTI to US$60 in June. And then it fell off a cliff again.)
The exchange oil futures has proven itself hugely sensitive to short-term data (not to mention headlines), which makes it difficult to count on anything lasting. And at US$38.50 a barrel, we’re still quite a distance from where the price being last year.
Still, the International Energy Agency’s most recent monthly report, released a week ago, seemed to forecast sunnier days ahead.
In fact, the Paris-based IEA pointed to expected declines in non-OPEC production (especially in the United States) this year, along with lower-than-anticipated output from Iran, as reason to suggest that oil prices might, at long last, have bottomed out.
But let’s put focus on “might.”
The IEA notes that the putative agreement between Saudi Arabia and Russia to “freeze” production – buzz over which has helped support the recent rally – probably will not have an effect until the second half of the season. That sort of assumes, though, the agreement will: a) actually happen and b) actually mean something, instead of being a largely meaningless little bit of PR.
Related
- Don’t allow the rally fool you: Commodity information mill going to an enormous debt cliffOil rally spiked: What’s making crude prices drop after galloping over the $40 humpFears of $20 oil fade away as speculation grows that crude may have already hit bottom
-
-
-
Iran has expressed zero interest in holding production, also it continues to have a long way to go to increase output before it hits its targets.
The IEA reports that Iran boosted output recently just by 220,000 barrels C far less than the half a million in extra production Iran predicted before it emerged from international sanctions.
Why the underage? Apparently, bankers and shippers are unwilling to do business with Iran C a sentiment that could be heightened by the current controversy over Iran’s recent ballistic missile tests. U.S. Presidential hopeful Hillary Clinton, among others, has required renewed sanctions.
So Iran’s re-entry into global oil markets, and its contribution towards the supply glut, might be slowed even further, that ought to support the price.
On another hand, it could stop behaving badly, at least until the next time, and at least long enough to reassure financiers and obtain its production to expected levels.
That’s the way it is by using geopolitics. It’s unpredictable.
Meanwhile, the main reason for that IEA’s new tone of optimism is the decline being produced from non-OPEC members, especially U.S. shale producers. The company expects American production to drop by more than half millions of barrels each day through 2016, as low prices finally force high-cost producers from the market.
The question, though, is whether the high-cost producers will remain from the market once prices recover. If they give in to, then increased tight oil production – an essential cause of the supply glut – will just tend to push prices down again.
Speaking of a glut, it hasn’t gone anywhere, and it’s still getting bigger. Based on the IEA, year-over-year production development in February was 1.8 million barrels each day, while demand development in Q4 2015 was 1.Two million bpd. If it is forecasts for supply cuts in non-OPEC countries are borne out, the agency expects second-half supply surplus will still be 200,000 barrels a day.
That suggests any supply-driven price recovery may have limited upside.
Let’s not forget, either, that the IEA in its previous monthly report described a “world awash in oil” and sounded a much more negative tone about the supply-demand balance.
Maybe the world has changed in a month. Or maybe not. Either way, it could pay to become wary of this rally – or at best not over expect from this.
