Oil prices find traction, but huge glut remains

Drillers in the United States pulled 94 oil rigs out of fields in a single week last week, the biggest retreat to date, as crude prices capped the longest stretch of monthly declines since 2009. Charles Rex Arbogast / AP PhotoShow less

The oil market took some solace from signs that the glut that has weighed on it for the past few months may get some relief down the road, but there were other indicators that it will take considerable time to soak up the massive overhang.

On Friday, the world benchmark North Sea Brent posted one of its biggest daily gains in months, ending US$3.86 higher at $53.99 a barrel, as traders focused on some bullish developments, including renewed fighting between Iraqi government forces and radical insurgents around the important oil town of Kirkuk.

Similarly allied radical insurgents in Libya also ratcheted up their violence last week, bombing a hotel in Tripoli and killing a number of western diplomats.

But it was news at the end of the week that oil rig use fell again sharply in the US that gave momentum to a slightly more positive outlook. The latest report from oil services company Baker Hughes that rig use fell by another 7 per cent added to similar recent reports showing the sector there slowing down, particularly rig use by onshore shale oil producers.

Brent crude futures seemed to have found some stability in the past two weeks just below $50 a barrel, having bottomed out in mid-January just above $45. Friday’s move had some traders expecting futures to find a new trading range above $50.

Though oil prices have fallen by nearly 60 per cent since last summer, many industry officials have reiterated in recent weeks they expect a turnaround to come once output adjusts.

“Short-term movements in the oil price can be driven by perception, and prices tend to overreact on both the upside and the downside,” said the Royal Dutch Shell chief executive Ben van Beurden last week. “In the medium-term, supply and demand fundamentals tend to reassert themselves again … and we have not changed therefore our long-term planning assumptions of $70-$90-$110 Brent, because the long-term outlook remains robust, and industry underinvestment today simply leads to more upside risk in oil prices in the future.”

That reasoning is also behind Saudi Arabia’s strategy of continuing to pump crude into a market that the Opec secretary general, Abdalla El Badri, acknowledged last week was being oversupplied at a rate of about 1.5 million barrels per day. But Mr El Badri also warned that underinvestment now would lead to $200-a-barrel oil down the road.

The Opec strategy means a continued fight for market share in the near term, a fight that began with Saudi Arabia sharply increasing its discounts for Asian customers in August, a move that was matched by other Gulf competitors.

Those discounts have now reached record levels.

Another bellwether for the market in recent months has been the fate of West African crude, much of which has struggled to find a market as domestic oil supply in the US continued to rise, pushing out the need for exports.

“Large amounts of [West African crude] headed east to Asia Pacific markets — the most we have ever recorded,” says Sean Cronin, the head of global markets at Argus, one of the oil market’s main price gathering companies.

But a lot of it remained unsold and recently was finding its way into refineries on the east coast of the US at distressed prices, which is forcing down the price for domestic oil, such as that from North Dakota’s Bakken fields.

“We’re looking at a very oversupplied market for the next five or six months,” says Mr Cronin. “There has been quite a lot of price activity to balance the market and there is a lot of supply that doesn’t really have anywhere to go.”

With refineries due to slow down in the coming quarter for regular maintenance, the oversupply situation is likely to get worse before it gets better.

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