HOUSTON — Some oil bulls here see signs of industry recovery in the recent run-up in crude prices — but others fear their optimism is premature.
Buoyed by reports of declines in shale oil output in the United States and draws and crude stockpiles, traders have responded to supply-demand reports by running up the price of crude oil. The markets have so far managed to lift West Texas Intermediate (WTI) crude above $60 per barrel, narrowing its split with the international Brent index, which now trades at around $66 per barrel. WTI had floated to as low as the $44-per-barrel range.
But while output is plateauing or possibly declining onshore in North America, yesterday the International Energy Agency (IEA) issued its latest report showing that output from the Organization of the Petroleum Exporting Countries has actually increased, offsetting any declines seen or perceived.
Some analysts see prices in temporary flux before they settle on a lower range. Still, other market observers see the beginning of the end to the dramatic crash in prices witnessed since the end of last year.
"We are decidedly bullish," James West, a research analyst, said at a panel discussion hosted here by the international law firm Mayer Brown.
The Paris-based IEA said in its monthly Oil Market Report that in April global crude oil production was 3.2 million barrels per day greater than during the same month last year, "despite slowing U.S. output of light tight oil," the agency said.
IEA data showed that the increase in supplies came mostly from non-OPEC producers, expanding production by about 830,000 barrels a day.
But the agency noted that OPEC nations also have increased their output, especially Iraq and Iran. Meanwhile, Saudi Arabia has held production steady at 10 million barrels per day, resisting calls to cut supplies in an effort to boost international oil prices and help the struggling budgets of major oil exporters.
‘We don’t think $100 per barrel is out of the question’
The oil bulls see cause for firming prices in the form of geopolitical unrest. Many economic agencies are also forecasting a recovery in the global economy, suggesting rising oil demand at a time when supplies from the United States are tightening (EnergyWire, May 13).
The continued fighting in Yemen and the perception that it puts Saudi Arabia in conflict with Iran is cited as one reason for the increase. Libya is still reported to be in a state of civil war, and the ongoing challenge posed by an Islamic extremist group holding sway over much of Iraq is another factor pointed to as some suggest prices will return to the $100-per-barrel range, reflecting a more V-shaped recovery in the price of oil.
"We will again see $100 to $90 per barrel in coming years," said John Gerdes, a research leader at KLR Group. He said his firm believes prices will rise to $80 per barrel by next year and strengthen further from there. "We do believe the forward strip has some upward bias to it."
West concurred, saying, "We don’t think $100 per barrel is out of the question." He reminded an audience that the average annual decline rate of existing, maturing oil fields was put at about 7 percent, and that this natural decline curve coupled with falling U.S. shale oil output and a stronger global economy should help to lift the market.
The IEA believes the global market may be oversupplied with oil to the tune of around 2.1 million barrels per day. While supplies are currently estimated at 95.7 million barrels per day, 2015 crude demand is forecast to rise by only 1.1 million barrels per day, to 93.6 million barrels a day.
Still, the estimate is for demand growth higher than what was recorded for 2014, expanding by just 700,000 barrels a day that year, according to IEA statistics.
Oil market bulls see firming demand, improving economic forecasts, dwindling flows from major U.S. shale oil fields, and violence in the Middle East and North Africa all supporting higher prices. Bears continue to warn that output may still be rising despite efforts by the industry to slow or pull back U.S. production. Growth is even expected to rise offshore in North America and the Canadian oil sands. And Iran could flood the market with millions more barrels should the European Union and Japan lift an embargo on Iranian oil, put in place to pressure Tehran on its secretive nuclear program.
In a note to clients published earlier this week by Barclays Capital, commodity analyst Kevin Norrish wrote that the recent rallying oil prices "appear to have moved ahead of improvement in the underlying fundamentals, and with fewer market makers to absorb the shocks, potentially a period of high volatility could lie ahead."
Norrish also frets that the recent rise in oil prices is creating a false sense of rejuvenation in the world’s economy. His analysis suggests the bank doesn’t believe the current commodity price rally is sustainable. "Indeed the risks are growing that the commodity price rally has moved too far ahead, too fast and that a steep downward adjustment could be just around the corner."
Academics and investment analysts who foresaw the current bear market predict that crude prices will yo-yo up and down for a period before settling at a lower range, where they could remain for a decade or more.