Oil prices are on the rebound as falling oil rig counts and violence in Libya helped further stall a selloff that began in June 2014. Brent futures posted a 9 percent gain on the week, their biggest since 2011, and 19 percent over two weeks, the largest since 1998. Brent settled up $1.23, or 2.2 percent, on the day at $57.80 a barrel. US also crude closed up $1.21, or 2.4 percent, at $51.69.
Crude prices have risen nearly 20 percent over the past six sessions, but remain about 50 percent below their peak from the middle of last year due to worries of a global oil glut. However, many analysts think the market will remain oversupplied through the first half while falling rig counts and reduced exploration budgets at oil firms suggest to some that the glut may be overcome faster.
Oil prices may stay depressed until summer due to weak seasonal demand even as Saudi Arabia’s strategy of curbing the output growth of rival producers might have started achieving tangible results.
US oil drillers continue to shut down rigs at breakneck speed. The latest data on US oil rigs from Baker Hughes showed that the number of rigs in use last week declined by 83 to 1,140. This is down from a peak of 1,609 hit in October 2014. This is the lowest oil rig total since December 2011. The number of oil rigs in use is down by 276 from the same week last year. Combining oil and gas rigs, the number of rigs in use was down 87 to 1,456.
The return of geopolitical risks
Just when analysts are thinking that the days of geopolitical risks are over, the violence in Libya is helping push oil prices up. Oil production in the North African country has fallen from 900,000 barrels per day to 325,000 barrels per day over the last three months. Militias have attacked airports and a major oil export terminal, igniting oil storage facilities that Libyan officials struggled to put out. The violence is cutting off significant volumes of production from several international oil companies; Total has shuttered a 40,000 barrel-per-day oil field in Libya, and ConocoPhillips says its Libyan production fell to just 8,000 barrels per day in 2014, compared to an average of 30,000 barrels per day the year before. The violence has blocked exports from Libya’s enormous Sidra port.
In addition, tensions are rising in Eastern Europe after reports surfaced that the US is considering arming Ukraine in its fight against Russian-backed separatists. France and Germany oppose American weapons heading to Ukraine. The standoff raises the prospect of more violence in Ukraine and a deterioration of already terrible relations between east and west.
OPEC cautious over oil price rebound
Delegates from the Organization of the Petroleum Exporting Countries (OPEC) and external experts are meeting at OPEC’s Vienna headquarters to discuss the producer group’s long-term strategy. Such meetings do not set output policy. OPEC oil ministers, who decide the group’s output policy, are not scheduled to meet until June 5.
The talks arise as data from the United States showed a record drop in drilling rigs, prompting oil prices to jump above $50 a barrel as traders said they saw it as a sign that OPEC’s strategy was taking a toll on the US shale boom.
“The low prices are affecting the investment of some companies in shale oil. This should affect the supplies in the longer term,” a delegate from a Gulf OPEC producer said.
Two other OPEC delegates, one of whom is from a Gulf producer, said they could not rule out prices dropping to as low as $30-$35 due to weak demand combined with global refinery maintenance in the first and second quarters of 2015.
Another Gulf delegate said: “The general feeling is that prices will still remain lower than what we all want because of the excess of supply in the market. The expectation is that these stocks will not decrease before the first half of the year.”
OPEC last November decided against cutting its production despite misgivings from its non-Gulf members, after Saudi Oil Minister Ali al-Naimi said the group needed to defend market share against US shale oil and other competing sources. The decision sent oil prices to what was a four-year low close to $71 a barrel. Crude later fell to a near six-year low of $45.19 on January 13, further than many delegates had expected.