Signs of positive momentum return to oil markets

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Signs of positive momentum return to oil markets
Eithne Treanor

By Eithne Treanor

Signs of positive momentum returned to the oil market this week as an American “peak oil” concept was contemplated. This had been the strongest price in two months also helped by a weaker dollar. By Thursday, nervousness had returned to the market and in early trading on Thursday, Brent crude was down again, priced around US$56 with WTI holding below US$50 a barrel.

Oil traders reacted swiftly to a drop in American production for the first time since January. This was data released by the Energy Information Administration. WTI jumped more than 5 per cent on the news, the biggest increase in the price since early February. The market has been extremely volatile of late and analysts are still cautious not to react too quickly.

The lower oil price has certainly taken investment off the market and companies have decreased the number of drilling rigs in use. While the rig-count might be lower, new technology and enhanced oil recovery has helped producers to extract more oil from existing wells rather than drill new ones.

The EIA said that American oil production had declined in January from the previous month to stand at 9.2 million barrels a day, down from 9.3 million barrels a day. Commerzbank issued a note this week saying the downturn in drilling activity “is now starting to be reflected in the hard production data.”

The volatility has not left the market and encouraging data one day can be upset by geopolitical factors on another day. Only last week in Riyadh, the Executive Director of the International Energy Agency, Maria van der Hoeven cautioned the key energy organisations and players “not to get too complacent,” saying that those missing barrels could be quickly brought back to the market if the price increases.

There’s no immediate sign of Iranian oil coming back on the market as the deadline for the preliminary agreement on Iran’s nuclear programme was extended. After an all-night session, the parties failed to reach an agreement to move to the next step, but negotiators are not giving up.

The market will be cautiously watching this situation, as a favourable agreement will ultimately mean the lifting of sanctions against Iran. The final deadline has been set for June 30th and in the event sanctions begin to ease, Iranian oil will soon find its way back on to the market in the months to come.

Industry players will be worried how quickly this oil will return to the market as any further barrels would complicate the delicate oversupply that currently exists.

The shipping industry has been kept busy supplying tankers for oil storage in recent months. There was fear that the US might run out of storage space for surplus cheap oil that’s been hoarded in recent months. Morgan Stanley said in a note this week that it expects stockpiles to peak later in the year, adding, “while the US faces a structural problem, 2015 is unlikely to be the tipping point.”

Thankfully, the driving season is near at hand and refiners have also bought vast quantities of crude to turn into product. The demand for product is still high with stronger response from the Chinese and Asian markets.

While the number of working rigs drilling for oil in the US has fallen by half since the peak in October, the country is still producing high volumes of crude. Russian production is also high and there’s been no cutback from other global players and OPEC members continue supplying their customers.

The oil industry standoff remains the norm for the time being, with uncertainty and volatility being the name of the game.

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