Oil prices hold strong despite uncertainties over US stockpiles

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Oil prices hold strong despite uncertainties over US stockpiles
Eithne Treanor

By Eithne Treanor

American stockpiles continued their decline for the third week and the geopolitical situation remained volatile. This added further uncertainty to the oil market, but the price held strong. In early trading on Friday, Brent crude was priced around US$66 with WTI back above US$60 a barrel.

The volatility on the market will stay with us in the near term having experienced price variations throughout the week up and down by close to 4 percent. The US dollar has maintained strength and the US Energy Information Administration said that stockpiles were down 2.7 million barrels mid month to 482.2 million barrels

American oil production, now just over 9 million barrels a day is not increasing this month despite the lower oilrig count. Gasoline stocks were down by 2.8 million barrels and distillates fell by half a million barrels last week. Refinery utilisation is higher at more than 92 per cent of capacity.

The surprise advance of ISIS west of Baghdad shocked the market, as did their advance into the historic city of Palmrya in Syria. Reports say this is the first time that ISIS forces took control of an entire city, causing mass evacuations. Its reported that soldiers in Palmyra ran away and left the advancing rebels to take control.

Elsewhere in the Middle East, two Iranian warships are reported to have joined an aid vessel en route to Yemen. This has caused concern, as the international community fears such an additional ship without United Nations approval and clearance could be entering the region illegally. The bigger concern is that further geopolitical instability will cut off oil supplies and put exports in the entire region at risk.

The increase in the oil price has been helping boost the stock market this week with shares in energy companies on the rise. Growth in the global economy has been holding up well in recent months but the latest figures in the US show a sluggish advancement of 0.2 per cent in the first quarter.

Exports are lower and oil production has decreased, making this the lowest growth since the final quarter of 2014 when we saw a healthy rate of 2.2 per cent. Output in mining and utilities has trended lower.

On the consumer spending side, the US housing market looks healthier and the unemployment rate is now around 5.4 percent. US Federal Reserve officials say that hiking interest rates in June would be premature despite signs of robustness coming back to the American economy. The Eurozone is showing better signs of improvement with GDP rising by 0.4 percent in the first quarter and 1 per cent year-on-year. Industrial production is also picking up.

The analyst community is divided on the optimism in the market in the longer term even though its expected that oil demand will grow steadily over the next few years. This was the built-in expectation even before the plunge in oil prices as incomes rise in developing countries and economic growth picks up around the world.

A report this week from Capital Economics says there are a number of reasons why oil demand might not surge. One is the removal or reduction in fuel subsidies in developing countries that “should mean that the prices paid by consumers don’t change by much, and could potentially even rise.”

The head of commodities research, Julian Jessop says that “high taxes on petroleum products in most developed countries mean that the full effects of the decline in oil prices aren’t passed on to consumers.”

He warns that “increasing energy efficiency, especially in transportation, should help to keep any rises in demand in check.” Taking such scenarios into consideration, Jessop and his team have kept their outlook for Brent at US$60 a barrel for 2015 with a medium term to 2020 average around US$70 a barrel.

Where the oil price will be in 2020 is anyone’s guess. In the near-term, the market is more comfortable to see strength back in the oil price, but investors remain cautious as the rebound came from such a low base, fundamentals are not balanced and the market remains oversupplied.

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