As the price of crude oil nears $50 a barrel for the first time this year, traders are split over whether the near 80 per cent rally since prices bottomed in January can keep going.
Here are five things to watch that could dictate the next move in the price of Brent crude, currently trading near $49 a barrel, and US benchmark West Texas Intermediate which is more than $48.
1. Nigeria and other troubled Opec producers
The latest leg up in prices comes as output in what was Africa’s largest producer has fallen to the lowest level in more than 20 years.
Militant attacks on oil-producing facilities, pipelines and terminals in the Niger Delta have slashed the Opec member’s output to less than 1.4m barrels a day — a drop of more than 40 per cent from its recent peak — and reignited fears of prolonged unrest reminiscent of the uprising between 2006-2009.
Libya’s output remains depressed, despite a provisional agreement between competing governments in the west and east of the country to restart shipments from the port of Hariga.
In Venezuela, another Opec member, President Nicolás Maduro has declared a 60-day state of emergency.
2. Supply disruptions
Wildfires in Canada’s oil-producing Alberta province have knocked out about 1m b/d or more than a fifth of the country’s production.
After the fires looked to be coming under control in recent days, oil sands producers Suncor and Syncrude were forced to evacuate staff overnight on Tuesday as fires spread. While most Canadian supplies are expected to recover in the coming weeks, there is still uncertainty about how fast that can happen.
Supplies are also falling due to the lower price. Output in the US, which drove the creation of the glut in the years preceding the price crash, has already fallen more than 500,000 b/d from its 9.7m b/d peak 13 months ago.
China, a top-five producer and still a major centre of demand growth, is expected to see output slip by more than 3 per cent or 140,000 b/d this year, according to Opec’s monthly report. In April it slipped to just 4.05m b/d, the lowest since August 2012.
All told, analysts put total supply disruptions at more than 3m b/d, helping to put the market into or close to deficit for the first time in more than two years.
3. Saudi Arabia
Is Opec kingpin Saudi Arabia going to raise output?
“While it would like to be prepared for a higher call on its crude as non-Opec supplies fall fast, increasing capacity takes time,” Energy Aspects said in a note.
4. US shale
US average annual crude oil output is forecast to fall from a peak of 9.4m b/d last year to 8.2m b/d in 2017, according to the EIA.
But higher prices have already seen the agency trim the size of the drop by 100,000 b/d since prices were languishing below $40 a barrel. Closer to $50, the outlook is less clear.
During the two-year price rout companies have been squeezing down costs. Some have said they could start drilling again above $50 a barrel. But the impact on the broader market may come even quicker through the futures market. After many experienced a near-death experience, banks will be asking companies to hedge as soon as the price is high enough to keep their operations (and debt repayments) going.
That will probably contribute to slowing the price’s upward ascent as companies sell forward their production.
5. Hedge funds
When oil prices bottomed below $30 a barrel in January, hedge funds started buying. In the first 19 weeks of the year, money managers were net buyers of Brent crude oil, accumulating a near record position equivalent to 420m barrels of crude. The move was largely replicated in US benchmark WTI where net longs — the difference between bets on rising and falling prices — rose to almost 250m barrels of crude.
This record combined bullish position, however, has been trimmed in both of the last two weeks. Some funds have been taking profits after the huge run-up. That has sparked some caution in case a trickle of profit-taking should turn into a flood, exerting selling pressure on the market.
Do you think the price will rise and stay above $50/barrel, let’s have your view.