Oil Price Surges Amid Shrinking Oil Glut - Is It Temporary?

Oil prices have increased from $40 per barrel levels witnessed toward the end of last year to current levels of around $47-48 per barrel, primarily due to supply shrinkages. The drop can be attributed to supply interruption in Nigeria, wildfire outbreak in Canada and reduced production in the United States.

Supply Drop in Africa and America

Nigeria was Africa’s largest oil producer until recently. Damaged pipelines, oil leaks and militant attacks on oil and gas installations in Nigeria have forced the oil majors such as Chevron, Royal Dutch Shell and Exxon Mobil to cut production. This has caused a new 20-year low in supply, resulting in disruptions close to half a million barrels per day. The early May attack on Chevron’s offshore platform by a group called Niger Delta Avengers caused an output reduction of around 90,000 barrels per day. Similarly, due to a militant attack, Royal Dutch Shell reduced its output by 250,000 barrels per day from its Forcados export terminal.

The slump in oil prices during 2015 has made drilling uneconomical for some oil producing countries. Many U.S. shale oil producers have shut down their drilling rigs, resulting in an 80 percent decline from 1,609 in October 2014 to 318 at present. Also, since the start of 2015, 130 North American oil and gas companies have declared bankruptcy. U.S. production has shown a drop of around 900,000 barrels per day from April 2015, currently producing around 8-9 million barrels per day. The wildfire that began during the first week of May around the Canadian city of Fort McMurray is another reason for low oil supply.

Predictions

At the same time, many oil analysts believe that current oil prices might flip in the last quarter of 2016 or by the beginning of 2017. The rise in oil prices will allow US shale producers to restart their operations as it is economically viable for over 50 percent of shale producers to produce oil only if prices are in the range of $40-$60 per barrel. Canadian supply outages were mostly due to the loss of manpower and evacuation of personnel and the situation is expected to be back on track soon. Canada’s oil sand operators are on the path towards a speedy recovery.

Saudi Arabia is focusing on its market share rather than prices. Saudi’s largest company Aramco is concentrating on increasing its output and is in the process of becoming the largest company in the world to be listed on a stock exchange. Saudi is planning to maintain its total output capacity at 12 million barrels per day with Iran also ramping up its production. Iran is focusing on regaining its market share and is in the process of increasing its exports by more than 60 percent as compared to last year.

This indicates that recent increases in oil prices might be short lived. With no major production cuts anticipated in future, prices are expected to experience a downward pressure and drop to levels below the $40 mark.

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