[ 2015-02-03 ]

Oil advances on US slowdown hopes
Oil added to Friday’s powerful advance with
Brent crude rising above $54 a barrel in the wake
of drilling data that raised hopes of a production
slowdown in the US.

Brent, the international oil marker, jumped 8 per
cent on Friday — its biggest one day percentage
increase since 2009 — following news that almost
100 rigs previously drilling for oil in the US had
been idled.

This was one of the sharpest weekly declines on
record and fuelled talk that non-Opec production
will fall this year, helping to balance a market
that analysts say could be oversupplied by around
1.5m barrels a day in the first half of 2015.

“We already see significant adjustments in
supply and demand balances due to lower prices”,
said JBC Energy, a consultancy, adding reactions
by the US shale industry and international oil
companies had been “swift and strong”.
Companies such as Royal Dutch Shell and
ConocoPhilips have slashed billions of dollars
from their investment programme in response to
lower prices. Others are expected to follow.

Optimism that oil had found a floor helped ICE
March Brent gain a further $1.45 to $54.43 a
barrel on Monday and West Texas Intermediate, the
US crude benchmark, added $1.08 to $49.37.

Crude has dropped almost 60 per cent since
mid-June because of a combination of strong supply
growth from US shale projects, sustained Opec
output and weak global demand.

The sell-off accelerated in November after the
cartel decided to hold production at 30m barrels a
day, rather than cut it to shore up prices.

However, several analysts cautioned against
reading too much into the US rig count data. Adam
Longson of Morgan Stanley said the market had got
too excited by the headline figures.

“They may look impressive, but as we look at the
data, much of the drop in oil rig count has come
in low yielding vertical/directional rigs — ie.
the low-hanging fruit,” said Mr Longson in a
report.

“Even within horizontal rigs, much of the
decline has come in lower performing plays or
lower tier counties within high-quality plays.”

Indeed, while US rig counts are falling, US
domestic production is still rising — it reached
a 31-year high of 9.2m b/d last week.


As such, many people in the oil industry believe
the price will need to trade around $40 a barrel
for a sustained period of time to slow supply
growth and keep capital investment in US shale
sidelined.

The continued fall in oil prices has complicated
matters for Algeria, writes Culmer Raphael’s
Edward Robinson,

“The price decline is not at an end,” said
Philip Verleger, an energy economist, in a report.
“It could easily go further, especially if the
United States needlessly inflames low-cost oil
producers by lifting its oil export ban.”

Many traders said Friday’s surge in oil price
was a “short covering rally caused by hedge
funds and speculative investors closing bearish
bets”.

They pointed to the latest data from the US
Commodity Futures Trading Commission that showed
hedge funds and other money managers raised their
short position in WTI to almost 130m barrels in
the week to January 27 — the most since November
2010.

Nonetheless, an increasing number of industry
watchers believe the supply adjustments brought on
by lower oil prices will be bigger and faster than
widely (and originally) expected.


“If our fundamental assessments of the oil
market are anywhere close to the realised path,
Opec might have all hands full to do to contain a
looming price spike later on in this decade,”
said JBC.

“In fact, with an expected 850,000 barrels a day
of price-induced adjustments in second half of
this year, the market might already be balanced
over that timeframe.”

Source - FT

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