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Not yet celebration time for rising crude oil prices




As international crude oil prices recovered remarkably in recent weeks from $28.5 per barrel in mid-January to around $40 per barrel, experts said that the worst is necessarily not over yet for the commodity in the global market.

Brent crude, used as an international benchmark, rose on Friday by more than five per cent, from the level achieved the previous day, to trade at $40.83 a barrel.

Both the International Energy Administration (IEA) and U.S Energy Information Administration (IEA) believed that crude oil prices might be rising for the wrong reasons.

The experts identified factors currently supporting higher prices to include possible action by oil producers to control output; supply outages in Iraq, Nigeria and the UAE; signs that non-Organisation of Petroleum Exporting Countries (OPEC) supply is falling; no reduction in our forecast of oil demand growth; and recent weakness of the US dollar.

According to EIA, with large global oil inventory build up expected to continue in 2016, oil prices are expected to remain near current levels, forecasting that Brent prices average $34 per barrel in 2016, $3 per barrel lower than forecast in last month’s report.

It stated: “Global oil inventories are expected to grow by an average of 1.6 million bpd in 2016 and by 0.6 million bpd in 2017, both higher than in last month’s report.

“Inventory builds are higher in this month’s report as a result of recent updates to historical data showing continued resilience from non-OPEC oil producers in the current low-price environment and as a result of a reduction in forecast global oil demand growth. Higher forecast inventory builds and slower market rebalancing contribute to a more limited price recovery in 2017 than previously forecast, with Brent prices forecast to average $40 per barrel $10 per barrel lower than in last month’s report.

“Prices reach an average of $45 per barrel in the fourth quarter of 2017, as the oil market becomes relatively balanced at that point, with the potential for inventory draws beyond the forecast period”.

The EIA identified the continuing large inventory builds as a major source of uncertainty in the price forecast, as the capacity of global oil storage to absorb builds of the forecast magnitude is unknown.

EIA noted that if global storage capacity becomes stressed, the cost of storage will rise to reflect more expensive marginal storage options such as floating inventories on crude oil tankers. “The higher storage costs would lower near-month crude oil prices. Additional uncertainty stems from the pace of global economic growth and its contribution to oil demand growth, and also from the responsiveness of oil producers to sustained low oil prices”.

IEA hinted that later this month some oil producers are expected to meet to discuss a possible output freeze. “We cannot know what this might be and in any event, it is rather unlikely that an agreement will affect the supply/demand balance substantially in the first half of 2016. Before any production freeze or cut is agreed, we have seen supply disruptions in Iraq, Nigeria and UAE. Production from these countries fell in February by 350 kb/d. Meanwhile, Iran’s return to the market has been less dramatic than the Iranians said it would be; in February we believe that production increased by 220 kbpd and, provisionally, it appears that Iran’s return will be gradual”, it said.

The IEA added that the focus is on non-OPEC countries to see if the high-cost output is falling. “There are already signs that this is happening: in the US, we expect production this year to fall by 530 kb/d, and we have downgraded our 2016 outlook for Brazil, Colombia and others. For the non-OPEC countries we now expect production to fall by 750 kb/d: our view last month was that this number would be 600 kb/d. Of course, there is no guarantee that this trend will continue, but there are clear signs that market forces – ahead of any production restraint initiative – are working their magic and higher cost producers are cutting output:, it stated.

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