Declining inventories in the US give a boost to oil prices despite the strength of the dollar

By Eithne Treanor

Oil inventories in the US continued their decline for a fourth week, giving the price a boost after surprising losses mid week. In early trading on Friday, Brent crude was priced above US$62 with WTI around US$58 a barrel.

The Energy Information Administration said crude stockpiles fell by 2.8 million barrels this week to 479.4 million barrels. The American Petroleum institute had predicted a build in stocks and the decline was much more than most analysts had expected, but the market remained cautious.

The strength in the US dollar is also putting pressure on the oil price as commodities priced in dollars become more expensive while the greenback gains strength. The summer driving season in the US won’t be the answer to the oil price decline in recent months, but the Memorial Day holiday kicked off this week where demand traditionally picks up around the country.

This week’s EIA Petroleum Status Report showed field production of crude oil rose by 304,000 barrels a day to 9.57 million barrels a day last week, now at the highest in weekly records since 1983.

The fundamentals of the oil market will keep the market nervous in the short term. Much uncertainty abounds and supply remains higher than demand. OPEC members Saudi Arabia and Iraq continue to boost production levels and investment bank Morgan Stanley says this extra production is just an element of the growing “list of headwinds” that’s adding stress to the oil market.

The bank also sees an increase in hedging activity and the stronger oil price is encouraging some American producers back into the market. The American rig count is around 659, but the decline has been much slower than previous months. Commerzbank says the WTI price is now at a level that makes “the production of shale oil attractive again.”

The Middle East’s geopolitical instability continues to impact the market as the Iraqi government pledges to recapture areas under Islamic State militant control. The rebels continue their push into Iraqi territory after the recent takeover of the city of Ramadi.

Iraqi military operations are underway to retake the rebel controlled Beiji oil refinery, the country’s biggest refinery that produced more than 200,000 barrels a day, about a third of Iraq’s oil production.

Low Libyan oil production is now priced in and few analysts expect production to resume any time soon. The country is still managing to produce around 600,000 barrels a day, a million barrels less than in 2011. Ongoing civil war disrupts oil production and distribution every week with government forces bombing a Greek tanker carrying gasoil near the rebel held city of Sirte this week.

The market is getting nervous in advance of OPEC’s upcoming meeting next Friday. Energy leaders will gather in Vienna for the OPEC Seminar in advance of the 167th meeting. The majority of leading analysts expect no change to OPEC’s production ceiling of 30 million barrels of oil a day. OPEC has held firm on its commitment to current output levels in an effort to support prices and let the market balance itself. That policy is expected to continue. A Bloomberg survey says OPEC members pumped 31.3 million barrels a day in April.

The expected health and rebound of the global economy will be key considerations in the coming months. There are signs that the US economy shrank in the January-March quarter for a second straight year, partly caused by a cold winter, a decline in the energy sector and an export slump caused by a higher dollar.

According to Moody’s Analytics, US growth is expected to reach an annual rate of around 3.5 percent in the second half of the year. The country is experiencing stronger jobs growth and increased consumer spending. Moody’s says annual growth should be around 2.5 percent.

India’s government will release its national income estimates for 2014-2015 today and advance estimates project India’s GDP during the year to grow at 7.4 percent, making it the world’s fastest growing economy surpassing China. India’s exports have fallen since December, but a sharper drop in inflation has helped the economic outlook for Asia’s third-biggest economy.

Oil demand in China is on the increase, up more than 5 percent to more than 10 million barrels a day. The country’s President Xi Jinping said he wanted to increase China’s strategic oil stockpiles,as they are significant to the country’s energy security.

The Chinese central bank is worried about deflationary pressure after its forecast of challenging growth prospects for the remainder of the year. The China National Petroleum Corp (CNPC) says it has discovered more than 100 million tonnes of tight oil geological reserves in its Changqing field.

Oil prices have recovered by about 40 percent from the lows last year but no one really knows how long this will last or where the price is likely to go. The market continues to hope that stronger demand in the second quarter will help balance the fundamentals and sustain a healthier price for all.

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