Oil price posts two-year highs - but how long can it last?

Brent rose above $59 a barrel this week, its best third-quarter showing since 2004

Oil drills
(Image credit: Mark Ralston/AFP/Getty Images)

Oil price starts week lower on rising US production

9 January

Oil prices have started out the second week of the new year on a negative note following reports of rising US production.

Brent crude, the international oil price benchmark, was down by 90 cents per barrel, or 1.5 per cent, to $56.24 at 11am in London trading. It had earlier been down by more than a dollar a barrel.

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Its US counterpart, West Texas Intermediate, dropped 80 cents per barrel, also around 1.5 per cent, to $53.18.

Oil has risen from a nadir in the low $40s in November on the back of an agreement to cut production by the powerful Opec cartel, along with several non-Opec producers, such as Russia.

From this month, Opec is to cut daily output by 1.2 million barrels as part of a 1.7 million barrels-per-day global reduction.

It is believed the plan will help return the market to supply balance, which experts say could boost oil prices to as high as $70 in the coming months.

However, several analysts are more circumspect, at least in the short term, amid fears that Opec members will not stick to their commitments and a potential resurgence in US shale output.

On Friday, a report from consultants Baker Hughes showed shale producers added rigs for the tenth week in a row, marking eight successive months of recovery in activity, says Reuters.

At current levels, many drillers "can operate profitably", Reuters adds, but a significant increase could undermine the cuts being made elsewhere and ensure the two-and-a-half year supply glut rolls on.

There are also doubts Opec's second largest producer, Iraq, will be able to honour its pledge to cut 210,000 barrels a day, says Oilprice.com.

The country is the only major oil producer in the region to rely heavily on global oil giants such BP and ExxonMobil, which may demand compensation if contractually agreed output is reduced.

Its semi-autonomous Kurdistan region in the north has also refused to endorse cuts made by the government in Baghdad.

For now, though, the country says it stands by its commitment, while other countries including Russia appear to be holding up their end of the bargain. So oil prices are unlikely to embark on a prolonged decline.

Oil price rally continues but analysts express caution

6 January

Oil prices rose this morning. Traders are optimistic that production cuts agreed by Opec and other major producers late last year will solve the problem of oversupply that has dragged the market down for years.

At 10.33am in London this morning, Brent crude was up 45 cents at $57.34 on its previous close. In the US, West Texas Intermediate (WTI) had risen 43 cents to $54.19.

Prices are roughly flat for the week, but trading has been "choppy", says Reuters, with investors hoping for a quick return as optimism returns to the market.

Hans van Cleef of ABN Amro said: "There's a lot of volatility, or at least changes in direction. People think the long-term trend is up, but after a gain of a few dollars, they take profit."

The price of oil fell for around two years between 2014 and last February when it touched lows of less than $30 a barrel. (In June 2014, the price of crude stood at $112 per barrel.)

For most of last year, however, oil hovered around the $50 a barrel mark thanks to a combination of factors that included wildfires in Canada that forced firms there to reduce their output.

The announcement in November that Opec had agreed to cut production by 1.2 million barrels per day in 2017, followed by pledges from other major producers including Russia to reduce output, has sent the price of crude upwards again.

The challenge now, says Bloomberg, will be finding out whether the producers are sticking to their pledges. While the US issues a weekly report on crude stockpiles, Opec nations are more opaque in their announcements.

Energy Aspects wrote this week: "There will be some countries who will cheat... We expect zero compliance from Baghdad... And we definitely do not expect the Kurds to join in, given that they are autonomous from the federal government."

Even when they do tell the truth about production, some oil producers take months to do so, says Bloomberg. Michael Cohen of Barclays told the company: "Data lags will be the primary problem in tracking cuts."

He warned: "The market could be whipsawed more by data and headlines than in the past."

The past few weeks have seen volatile prices. These look likely to continue well into this year as investors wait to see if the market really is rebalancing.

Oil price: Drivers hit as petrol prices touch 18-month high

5 January

UK fuel prices are at an 18-month high due to the recent recovery in the price of oil.

Drivers were charged an average of 3p per litre more to fill up in December alone, says the RAC, with unleaded costing around 117.23p and diesel at 119.63p, the motorists' group says.

The increases reflect the recent upswing in the cost of crude oil. After reaching lows of less than $30 a barrel in January and February last year, prices stabilised around the $45-$50 mark.

But November's announcement of a production cut from Opec, followed the following month by a similar pledge from other major oil nations, including Russia, has boosted prices.

After jumping ten per cent on news of the Opec deal, Brent crude is now hovering around $55 per barrel and analysts remain optimistic for further recovery this year.

Drivers are also being hit by sterling's fall in value following last June's Brexit vote. As oil is priced in dollars, UK refiners now have less purchasing power and so are passing the cost on to customers.

The RAC predicts prices will continue to rise over the next fortnight and predict unleaded petrol will hit 118p per litre and diesel 121p per litre.

What remains to be seen is whether Opec and the other producers fulfil their promises. The cartel has promised to cut production by 1.2 million barrels per day, while Russia has pledged to reduce daily output by 600,000 barrels.

Simon Williams of the RAC said: "So far the price rises we've seen are purely down to the announcement at the end of November that Opec and non-Opec countries would be cutting oil production this month.

"Everything now depends on the strength of the deal and each country sticking to the agreed production levels. Russia will be of particular interest as it is currently producing at near record levels."

Oil price rises as US stockpiles look set to fall

4 January

Oil prices rose this morning on the news that experts believe that US stockpiles of crude are falling, amid continued optimism that the world's major producers will soon scale back production.

In the UK, Brent crude was up by 29 cents on yesterday's closing price at $55.76 a barrel at 1.30pm UK time. In the US, West Texas Intermediate rose by 31 cents to $52.64 per barrel, says Reuters.

The rise is partly driven by rumours that the official weekly figures on US crude stockpiles, released on Thursday, will show there are 1.7 million fewer barrels in reserve than there were last week.

Oil prices have fallen dramatically over the last two years and more, dropping to a 13-year low of less than $30 a barrel last February. (In June 2014, the price stood at $112 per barrel.)

Since February, however, prices have recovered. They now hover around the $50 mark.

In November and December last year, Opec nations and other major producers announced plans to reduce production. This should mean higher prices, so traders have been increasingly optimistic over the past few weeks, driving prices higher.

It remains to be seen whether the promised output cut deal will be as influential as expected.

North Sea slump

The depressive effects of years of weak prices have hit the UK industry badly: a study released this morning shows that the number of oil and gas firms going bust is at an all-time high.

The accountancy firm Moore Stephens says that 16 UK firms in the sector became insolvent last year, up from two in 2015 and none at all in 2012, according to Energy Voice, a news site in Aberdeen where the UK's oil industry is based.

Moore Stephens says: "The collapse of the price of oil has stretched many UK independents to breaking point. Unless there is a consistent upward trend in the oil price, conditions will remain tough for many of those and insolvencies may continue."

Energy Voice has compiled a list of oil and gas firms that went bust in 2016. These include Iona Energy, EESL and Harkand Group. Life after oil can take unexpected new directions. One redundant offshore worker – Aberdeen-based Theo Robertson, 27 – has turned his life around by becoming a champion pole dancer.

Oil price: Insiders are confident crude prices will recover this year

03 January

Oil industry insiders remain optimistic that prices will pick up this year, thanks to the production cuts agreed by Opec and other major producers in November. But the road to recovery will be far from smooth, warns the Wall Street Journal.

Oil prices have endured a long slump in the last two years, thanks to a global oversupply of the commodity. From a 2014 high of $112 per barrel, the price dropped to just $30 a barrel in February last year.

Since then, there has been a sustained recovery, with prices hovering around the $45-$50 per barrel mark for much of the rest of 2016. With as much as 94 million barrels a day still being produced last year, there was not enough demand for prices to rise further.

In November, however, Opec nations agreed to their first cut in production for eight years. In December, Russia and other major non-Opec producers agreed to curb exports as well, starting in January.

Around two per cent of global production should be cut down in 2017 – and the news has prompted widespread optimism in the markets. Some analysts expect prices to recover to $60 a barrel or above this year – prices not equalled since 2015, says the WSJ.

Adam Ritchie of Petro-Logistics SA says: "The mood has definitely turned more bullish, people are more confident that OPEC will do enough to rebalance the market in the first half of 2017."

But he adds that the rebalancing of supply and demand could take some time: "I don't think people have fully grasped the scale of the excess inventory that has to clear, so the imbalance between supply and demand needs to be corrected dramatically and for a very long period of time."

The road to recovery will not be smooth, says the WSJ. For a start, it remains to be seen whether the promises made late last year will be kept. Opec has a "poor" record of sticking to planned production cuts, the newspaper says.

Furthermore, the number of wells drilling for crude in the US has increased since last summer – and their supply has not hit the markets, so its effects are yet to be felt.

Increased prices could also limit demand, says the paper. China will curb its purchases because the dollar is at a 14-year high.

The markets "risk overplaying their hand", according to Oil Price. So many investors are betting on a long-term recovery that there is a risk of a "snap back" in the other direction, says the site.

Whatever happens, nobody is predicting a return to the pre-bust highs of $100 a barrel for 2017, says the WSJ.

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