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 hits eight-week high - briefly

29 February

After a stuttering start, the oil price settled into a strong rally at the end of last week, with international benchmark Brent crude touching an eight-week high above $37 a barrel on Friday. But it didn't last long.

The price fell back to a little above $35 a barrel by the end of the final session of the week in New York, meaning it was essentially flat for the day. Despite an earlier rise in the overnight Asian session, Brent continued falling and dipped below that threshold again this morning in London.

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Some positive data on supplies in the US over the weekend prompted the modest upward move in Asia. The Energy Information Administration revealed output from the country fell to 9.1 million barrels a day last week, notes the Wall Street Journal. Other data published last week also noted a decline in the number of active rigs in the country.

This level of production is still high, however, and the market remains obsessed with overall oversupply. In that respect, the ongoing talks aimed at achieving a production freeze are more influential – and doubts based on the fact that Iran is still notably absent from discussions involving Saudi Arabia and Russia are driving sentiment.

For the moment, most analysts predict the return of Iran to international export markets – with pledges to boost its oil output by one million barrels – will weigh on the oil price, which will be volatile but low. The Financial Times highlights that there have been four daily price swings of above seven per cent in February alone, but that prices have barely moved over the month.

In the longer-term, the demand factors that have contributed to the price fall in the past year may become ever more apparent over the next two decades and undermine the International Energy Agency's prediction of a price spike to come.

Oilprice.com points to the rapidly falling cost of batteries used in electric cars that could prompt an "epochal shift" for energy markets starting from the early 2020s.

A report from Bloomberg New Energy Finance suggested that by then, the cars could displace two million barrels of oil demand a day – and go on to account for 35 per cent of the market by 2040. Pledges to tackle the growing threat of climate change will also likely see governments backing the rollout of the technology.

"To the extent that oil remains cheap indefinitely, it will be because [electric vehicles] destroy demand," the report adds.

Oil price rallies as another output meeting is agreed - but has anything changed?

26 February

After a strong rally in New York on Thursday, the oil price has resumed the upward move in London today, following a modest dip at the outset of trading.

There are a few factors fuelling the rally, says Reuters. Firstly, US data earlier this week showed a big gain in crude oil inventories but also a sharp rise in demand for petrol and distillates, which analysts reckon is a sign low prices are prompting more buying.

"The idea that gasoline demand is actually rising suggests that perhaps the lower prices of crude are actually prompting a greater usage of this [gasoline]," said Vyanne Lai, an oil analyst at National Australia Bank.

Reuters also focuses on Monday's expiry date for the front-month Brent contract, the most immediate futures price relating to shipments in the coming month, which is causing traders to cover off bets on lower prices.

But the BBC says the main reason prices have moved is the news of another meeting will take place next month between oil powers seeking a deal to freeze production. The oversupply resulting from a global turf war remains the main sentiment driver and the market is in the thrall of a rumour mill on a potential agreement.

Most observers, though, continue to assert we're a long way from any deal – and that even if one was struck, it would only freeze output at January's high levels and do little to ease the overhang in the short term. The big concern is that while Saudi Arabia and Russia will be present at the March meeting, alongside Qatar and Venezuela, Iran will not.

Without some compromise with the republic, which is seeking to boost its supply by one million barrels a day to return to pre-sanction levels, there will likely be no final accord.

"It's the Venezuela headline that got the market excited enough to rebound, though it's baffling why, as everyone knows of this meeting and that it's not going to achieve anything," said John Kilduff, a partner at Again Capital, the New York energy hedge fund.

Oil price: why the market is completely 'out of whack'

25 February

Producers in the US and elsewhere will be forced to give oil away for free within the next three years, according to one of the US Federal Reserve banks.

OK, no one actually expects oil to handed out for nothing – as Fortune says, it is just too important to "nearly every economic activity". But the Federal Reserve Bank of St Louis did come up with a startling forecast that oil will fall to $0 a barrel by mid-2019, based on a model that has proved very accurate in the past that ties in the price of the commodity to inflation expectations.

St Louis reverse engineered a formula used to predict inflation based on futures prices for oil in the past – a model that, from July 2014 through December 2015, "predicted future inflation almost perfectly" – to arrive at a future oil price based on current inflation expectations.

Oil and inflation are typically strongly correlated as oil is critical to many prices. Consequently, shat this analysis really says is that, on a forward-looking basis, the market's expectations for zero inflation and a gradual but material recovery in the oil price "just don’t make a lot of sense when you put them together".

Fortune says it shows that "financial markets are out of whack" and that policymakers are "going to have to discount one or another of these variables".

It adds: "Either the market is underestimating inflation, or overestimating the future price of oil".

Many analysist have of late cited the lack of logic in the market – the Financial Times quotes Goldman Sachs, which predicted oil could fall as low as $20 a barrel, branding the market "volatile and trendless". Investors are obsessed with a supply glut to the extent that loss-inducing prices are now entrenched, while the rumour mill on production policy is now dragging prices around.

This is why oil fell earlier this week, after Iran poured scored on a proposed production freeze. Prices rose during afternoon trading in New York on Wednesday, after a report pointed to strong petrol and distillate demand in the US, but have since fallen back. International benchmark Brent crude is back below $34 a barrel.

Oil price: 'we can live with $20 a barrel,' says Saudi Arabia

24 February

There will be no short-term resolution to the current oil glut in the form of coordinated production cuts, Saudi Arabia's oil minister has warned.

In comments at an industry conference in Houston that sent the oil price spiralling lower, Ali al-Naimi stated categorically that a cut in supplies "is not going to happen", reports the Financial Times. International benchmark Brent crude fell from above $34.50 yesterday afternoon to below $33 this morning on the news.

The market had hoped this month's tentative deal to freeze output - struck between Saudi Arabia and Russia, among others - would eventually lead to a more definitive tightening of the spigot.

However, Naimi said "there is less trust" between the big oil powers and so cuts were not a realistic option, reports CNBC.

"Not many countries are going to deliver. Even if they say they will cut production, they will not deliver, so there is no sense in wasting our time seeking production cuts," he added.

In an attempt to gradually rebalance the market, Saudi Arabia is still seeking to finalise the freeze, which was also agreed with Opec members Venezuela and Qatar. But seeking cooperation with the likes of Iran, which is ramping up production after emerging from international sanctions, promises to be difficult – reports earlier in the day said Iran's oil minister called the proposal is "a joke".

Sending a strong signal of its intention to hold firm in its turf war, Naimi said Saudi Arabia can live with oil as low as $20 a barrel even if it doesn’t want to. This is the level some brokers have predicted could be reached if entrenched oversupply continues.

There are, though, those who reckon that behind the steely rhetoric, producers have softened their stance considerably and that a recovery will come faster. Pavel Molchanov, the senior vice president and energy analyst at Raymond James, told CNBC oil could be as high as $60 by the end of the year.

"We are not talking about $100 - it's not going back to $100 - but certainly something in the $50 to $60 range. Maybe north of $60 looks like a good bet over the next nine to 12 months," he said.

Oil price spike is coming – but not for years

23 February

It was a very familiar narrative: the oil price will not recover meaningfully until 2017 - and then only slowly, while it will not even come close to the $100 at which it previously peaked by the end of the decade.

This was the latest forecast from the International Energy Agency, published in a report unveiled by director Fatih Birol in Houston yesterday.

But there was a sting the tail. The study also predicted that as we head into the early 2020s, the oil price could "spike" dramatically as the consequences of a current pullback in investment filter into actual output.

The forecast for the price to remain largely unmoved this year was based on an assumption that the oil market, which is currently producing an excess of as many as two million barrels a day, will remain oversupplied until at least early 2017. Even then, Birol warns the enormous reserve stockpile will "act as a dampener on the pace of the recovery", The Times reports.

Prices will recover only gradually to $80 a barrel by 2020, Reuters adds. International benchmark Brent crude had peaked at a little above $115 in mid-2014.

After that, prices could surge rapidly. The International Energy Agency cites the huge reduction in investment this year and last – it will have dropped from $520bn a year to $320bn (£368bn to £226bn) and "far below the minimum levels needed to keep up with future demand", according to the Daily Telegraph – as having the potential to lead to an oil security crisis that will send prices spiralling higher.

"It is easy for consumers to be lulled into complacency by ample stocks and low prices today, but they should heed the writing on the wall," said Birol.

"The historic investment cuts we are seeing raise the odds of unpleasant oil security surprises in the not-too-distant future" he adding, raising the "risk of an oil price spike".

International benchmark Brent crude rose initially yesterday, as the report was published, and hit a high of $34.70 before falling back. It was around $34 a barrel this morning.

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