The International Energy Agency calls it a “head fake” – the market seems to be moving in one direction but is more than likely to move in the other. Don’t blink: it may change in a second.
“On the face of it, the oil price appears to be stabilising,” the Paris-based agency said on 13 March in its latest monthly oil market report. “What a precarious balance it is, however,” it added.
US drilling activity has plunged but supply is up
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Despite the reduction in the rig count in the US to the lowest number in years, the US keeps pumping out more oil. At the same time, this potential downward pressure on oil prices is being matched by stronger than expected demand.
Refined product prices have risen faster than crude on the rebound, suggesting higher demand.
All in all, the IEA suggests that oil prices have become range bound with Brent futures trading around $60/bbl and WTI nearer to $50/bbl.
The IEA puts it like this: “Behind the facade of stability, the rebalancing triggered by the price collapse has yet to run its course, and it might be overly optimistic to expect it to proceed smoothly.”
With US supply up, estimates of Q4 2014 US output have been revised up as have forecasts for supply in Q1. A great deal of oil is going into storage but costs are rising as available storage becomes far more difficult to find.
The steep drop in the US rig count was behind the price increase at the end of January but the impact of still strong US supply growth has been balanced out by the volumes of oil going into storage.
“At last count, total US crude stocks stood at 468m bbls, an all-time record. The unwinding of seasonal refinery maintenance may slow US crude stock builds in the second quarter of 2015 but will not stop them, and stocks may soon test storage capacity limits,” said the IEA.
So more price weakness would be likely to follow which would put further pressure on for supply cutbacks.
And, of course, the reactions to sharper supply cutbacks could be abrupt. Supply disruptions are possible given conflict and political turmoil in the Middle East and North Africa, and also because of the strength of the US dollar.
“Product demand has shown signs of life, with even European demand emerging from a secular decline to show strong growth of 3.2% in December and 0.9% in January,” says the IEA, But it does warn of the impact that possibly North America weather-related seasonal factors may be having on the data. And demand may have also been supported by storage-related plays, it added.