However, the hike is likely to be limited as supply continues to outpace demand
March 10, 2016: After more than a year, oil companies have something to smile about. Prices have finally started heading northwards to touch $40 per barrel after plunging below $27 in February.
In February, Saudi Arabia, Russia, Venezuela and Qatar together decided to freeze production at January levels. Though the deal made little sense to experts given that Iran and Iraq did not join the pact, it now seems it (the deal) has achieved to some extent what it was meant to.
“Following the dialogue between Saudi and Russia, there have been some supply disruptions in Iraq and Nigeria. Additionally, the US has reduced production by 600,000 bpd this year due to lower oil prices,” says John Hall, chairman, Alfa Energy.
It is believed that falling oil prices are having an impact on its shale market. The number of rigs is probably down to around a quarter of its original level. Output is expected to decline this year and again next year simply because output at a price below $40 is not sustainable.
“Of course, when the price rises, production is expected to increase as well putting a cap on the price. Looking ahead, the market will presumably regulate itself at the $25-50 level,” remarks Hall.
Michael Hewson, chief market analyst at CMC Markets, is of the view that the decision to cap production at January levels is only part of the reason behind the rebound in prices. “The recent weakness in the dollar has also helped. The fall in US production level is likely to cause the price levels to plateau and eventually fall back,” he says.
Hewson believes that the price is likely to touch $45 a barrel “but the reality remains that supply is likely to continue to outpace demand until we see a pickup in global economic activity. With Iran looking to increase its own market share, any upside is likely to be limited, notwithstanding the ability of US shale producers to bring back currently mothballed shale assets, which are currently uneconomic at current price levels”.