Why Have Oil Prices Touched $50 Per Barrel In The Last Few Days?

May 27th, 2016 by Trefis Team
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Anadarko Petroleum

After having touched close to $26 per barrel in the beginning of 2016, crude oil prices have rebounded to almost $50 per barrel in the last few days. While this seems to be a positive news for the oil and gas companies, the sustainability of this recovery needs to be verified before revising the estimates of these companies. Thus, in this article, we discuss the various reasons that have resulted in a faster-than-expected recovery in crude oil prices and the sustainability of this recovery.

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The year, 2016, began on a sad note for the oil and gas industry as the crude oil prices tanked to under $30 per barrel, when the Organization of Petroleum Exporting Countries (OPEC) decided to continue to pump record levels of oil, despite the oil surplus in the market. The WTI Crude oil prices averaged at around $33 per barrel in the March quarter of 2016. However, in April, the oil prices began to shoot up, largely due to the better-than-expected global oil demand numbers and the disruption of oil supplies in Nigeria and wildfire in Alberta, Canada.

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Let’s discuss each of the reasons in detail. Firstly, the US Energy Information Administration (EIA) released the Weekly US Petroleum Data, which highlighted that the US crude oil inventory has dropped by 4.2 million barrels in the week ended 20th May 2016, compared to the previous week. Though the market had expected the US oil supplies to decline due to the disruption of production in Canada, the fall in inventory was 0.9 million barrels more than what the market was estimating. Hence, the investors reacted promptly to the news, resulting in a steep rise in the oil prices. While the drop in US inventory is an encouraging sign for the oil markets, the disruption in Canada and Nigeria is improving at a fast pace. Further, the current level of US inventory of 537.1 million barrels, despite the small slide, is at a historic high for this time of the year.  However, if the US oil inventory continues to plummet consistently over the next couple of months, there could be chances of a sustained recovery in oil prices.

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Secondly, the US oil production, which plays a significant role in the determination of the oil prices, has been declining over the last few months. Since the OPEC has decided not to curb its production, the US oil producers, who have higher break-even costs, have been forced to cut down their production. According to the latest data released by EIA, the US oil production, for the week ended 20th May 2016, has come down to 8.8 million barrels per day. This is the lowest the country has produced in the last 20 months. When compared on a year-on-year basis, the US oil production has dropped more than 5%. Again, this is a positive news for the commodity markets, since this is likely to reduce the supply-demand mismatch in the market. However, with the Canadian oil production expected to come on-board soon, and OPEC not showing much signs of changing their stance, the US oil production could start increasing soon.

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Finally, we discuss the demand side factor affecting oil prices. Based on the data released by the International Energy Agency (IEA), the global demand for oil grew 1.4 million barrels per day in the first quarter of 2016 compared to 1.8 million barrels per day increase in the same quarter last year.  However, the growth in 1Q’16 was driven primarily by the emerging markets, while the rise in 1Q’15 demand was driven by the developed markets. Thus, IEA expects emerging markets, particularly the Asian markets, to boost the global demand for oil in 2016. Of these emerging markets, China and India are likely to play a critical role in this growth. While the importance of China in the determination of oil prices is commonly known, India has interestingly emerged as another strong driver of global oil demand. The IEA forecasts India’s demand for oil to reach 10 million barrels per day by 2040, 6 million barrels per day higher than its current demand. Although China’s oil demand will be 1.5x of India’s demand in 2040, the growth in India’s oil demand will surpass that of China’s by almost 1 million barrels per day.

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In conclusion, we highlight that while the US production has been declining steadily over the last 20 months, the drop in production will have to be larger and consistent to create a dent on the existing oil surplus in the market and to improve the oil prices. Also, stronger-than-expected growth in oil demand will augment stabilizing oil prices. However, the meeting of the OPEC next week will play a key role in deciding the course of the oil prices for the remaining half of 2016 and beyond.

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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com

2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Anadarko Petroleum

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