The bulls are back in force in the oil market. Brent crude climbed to a seven-month high around $50 a barrel this week, taking its second-quarter gain to 27%. It is up 80% from the 13-year trough it reached in January. The oil market has ended up in deficit “much earlier than we expected”, according to Goldman Sachs.
Supply disruptions around the world have reduced the global glut. Militant activity in Nigeria has reduced output to its lowest level in decades. In America, low prices have hit shale producers, and overall production is down 8.4% from the 2015 peak, say Henning Gloystein and Dmitry Zhdannikov on Reuters.com.
Lower prices have also discouraged production in China: it slid by 5.6% year-on-year in April, the steepest fall in four years. Wildfires have hit Canadian output, while power cuts have done the same in Venezuela.
In the meantime, Chinese demand has risen and the International Energy Agency has highlighted India’s growing thirst for crude. It is the world’s fourth-biggest oil consumer now, behind America, China and Japan. The upshot, reckons Goldman, is that demand could exceed production in May, compared to a 1.4 million-barrel-per-day surplus in the first quarter.
Still, don’t expect prices to shoot to the moon. Inventories are plentiful, and the latest supply disruptions are unlikely to prove permanent, as Morgan Stanley points out. The rebound in prices could also entice some American producers back into the market.
The surplus still seems set to dwindle gradually as supply declines and demand continues to grow, but oil might have come a bit too far too soon.