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Pain of low oil prices may be easing

Published: 10:48 13 May 2016 EDT

oil barrels in a stack

The pain of low oil prices and over supply may be easing as global stockpiles reduce and signs of an increase in demand begin to look more realistic.

The International Energy Agency sees strength coming back to the market but the stronger dollar is weighing on the price this week.

In early trading on Friday, Brent crude was holding above US$47 with WTI higher than US$46 a barrel.

American crude production is gradually decreasing and is down more than 8 percent from its highs in 2015 to 8.8 million barrels a day, according to the US Energy Information Administration.

Production has been reported falling for the past 9 weeks.

The report also revealed an unexpected decline this week in crude inventories by 3.4 million barrels.

Canadian oil output was temporarily hit due to closure of plants following the severe wildfires last week.

OPEC monthly oil report

In its OPEC monthly oil market report, the organisation noted that American production is “expected to contract by 430- thousand barrels a day this year,” following strong growth in the previous two years.

The low oil price environment has cancelled or deferred much investment in the past year.

The OPEC report estimates “some US$290 billion is estimated to be cut from company’s capital expenditure” in period 2015 to 2016.

Looking ahead, the report estimates that “between 2016 and 2018, the industry is expected to invest around US$40 billion per year in exploration and appraisal,” less than half its investments during period 2012 to 2014.

OPEC left its forecast for global oil demand growth for 2016 the same as last month at 1.20 million barrels a day.

OPEC’s production for April is currently at 32.44 million barrels a day, with total global oil demand last year at 93 million barrels a day.

IEA had its say

The International Energy Agency also delivered its monthly report, saying it expects non-OPEC production to fall by 800,000 barrels a day this year.

The agency also sees expected demand growth moving in a more positive direction, unchanged at 1.2 million barrels a day for 2016.

"Any changes to our current 2016 global demand outlook are now more likely to be upwards than downwards, as gasoline demand grows strongly in nearly every key market.”

The IEA sees robust consumption from China and Russia with India being the “star performer,” with oil demand growing year on year.

Change in Saudi oil leadership surprised

The shift in energy leadership in Saudi Arabia surprised the market at the beginning of the week as 20-year industry veteran Ali Al Naimi stepped down and handed the mantle of Saudi’s oil policy to the former health minister and Chairman of Saudi Aramco, Khalid al-Falih.

This shift was part of a wider government reshuffle by Deputy Crown Prince Mohammed bin Salman and Al-Falih takes over a newly merged ministry of energy, industry and mineral wealth.

Al-Naimi will no doubt welcome the move as he has been attempting to retire for several years, but many industry watchers had expected him to remain at the helm until after the June meeting.

With the collapse of the Doha talks last month, the Saudi government is making it clear its time to move on. Al Naimi meanwhile stays connected with the government as advisor to the Royal Court.

The market welcomed al-Falih’s somewhat expected appointment due to his intense knowledge and his experience of the oil industry, but no-one expects a change in Saudi Arabia’s policy.

All eyes are beginning to focus on OPEC’s first official meeting of 2016 on June 3rd in Vienna. 

OPEC member countries have a variety of issues to contend with as many, like Libya, Nigeria and Venezuela are suffering production interruptions.

Iraq and Iran continue to produce and while the strength in the price is encouraging, the fundamentals have not shifted and we’re still seeing over-supply in the market. 

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