Oil prices are on the rise again. This week Brent futures traded around $62 a barrel, having gained more than 40% from their six-year low in the past four weeks. Investors feel that the global glut that precepitated the recent slump should soon start to recede, says Tim Webb in The Times.
US explorers are already cutting back. The US weekly oil rig count, a widely monitored indicator of future production, slipped to a six-month low last week after the second-biggest weekly drop since records began in 1987. That will affect short-term supply growth. Major players such as Royal Dutch Shell and Chevron have cut their investment plans, which will curb longer-term expansion.
Output in parts of the Middle East is also once again under threat. The government in the semi-autonomous Kurdistan region of Iraq has threatened to withhold oil exports if Baghdad doesn’t meet an outstanding payment, while violence in Libya has worsened; Libya is “already mostly out in terms of production”. Throw in ongoing turbulence in Syria, and “the appetite for investments in the Middle East is close to zero”.
The rally may have got ahead of itself, however. As Mary de Wet points out in Barron’s, the cutbacks in exploration have yet to feed through to production, which in America is still running at the highest level since 1986. Higher prices have yet to have a significant impact in stimulating demand growth, which isn’t keeping up with supplies. American crude oil stocks climbed to an all-time record late last week.
The upshot, says Capital Economics, is that we shouldn’t expect the oil price to rise back to $100 a barrel. It will probably finish the year pretty much where it is now, climbing to $70 in the next few years.