oil prices may begin to heave a sigh of relief. This is because oil prices soared to a one-month high on Tuesday, in an apparent response to a U.S. refinery strike. Brent crude gained $2.25 to finish the day at $57 per barrel, while OPEC’s basket of 12 crudes stood at $51.77 per barrel, up from $48.19 the previous day. And OPEC has even gone further to elevate such hopes by suggesting oil prices could go as high as $200 per barrel.
The labour action pushed up prices for petroleum products as concerns that the refineries could shut down fuel production rise. “You have a sequence of events that has really spiked this market,” including the refinery strike and announcements that major oil companies are cutting their 2015 spending plans,” the Wall Street Journal quoted Bob Yawger, director of the futures division at Mizuho Securities USA Inc. as saying.
Expected output cut
The price rally also came following the release of data showing that there was a slowdown in US demand for leasing oil rigs, a sign that producers might be planning to cut output.
The data released last Friday, according to UK’s The Times, showed over 90 oil rigs in the US as being idle, the largest number since the mid-1980s to be idled in a day.
“There were a lot of people on the sidelines waiting for an opportunity to buy,” Bjarne Schieldrop, chief commodity analyst at a leading Nordic provider of financial services, SEB, told the BBC.
Have oil prices bottomed out?
Speculation is running rife that oil prices might have bottomed out, but analysts say the world should not forget that the global crude market is still oversupplied. A global glut of the commodity had driven the slump in prices, which began last July. Shares of oil companies have plummeted, as well as currencies of oil-producing nations like Nigeria and Angola. The decline has also prompted cutbacks to investment and spending in the energy sector, with countries like Angola even suspending infrastructural projects as a result of dwindling government revenues. Although OPEC output rose in January, the cartel says oil prices may rebound and could go as high as $200 per barrel.
Oil could sell for more than $200 per barrel
According to the OPEC Secretary-General, Abdulla al-Badri, oil prices have already bottomed out. “Now the prices are around $45-$55, and I think maybe they [have] reached the bottom and we [will] see some rebound very soon,” he told Reuters on the sidelines of a conference at Chatham House, London on Jan. 26.
By this statement, Al-Badri may be stressing the cartel’s stance that the market will shape prices, as there is no sign OPEC will cut output. Exports from Angola increased in January. Saudi Arabia and other gulf producers also maintained a steady to higher output in the month.
In another reaction that shows the continued investment in exploration by oil firms working in East Africa is a step in the right direction, the OPEC Secretary-General says cutting back investment at this time may put future supplies at risk.
“If you don’t invest in oil and gas, you will see more than $200,” he said, concerning future oil prices. However, he did not give a timeframe for oil price rise. Oil production declines naturally, it is therefore very important that oil companies invest in further development of production lines to meet growing demand. Oil companies are, however, reluctant to invest in new production as their cash flows decline.
Some oil operators are already closing small old wells in the US. The Saudi Arabian Oil Company, Saudi Aramco, which is considered the world’s largest oil company, has also suspended its deepwater oil and gas exploration projects in the Red Sea. But despite the falling oil prices, exploration has continued in Kenya. Canadian oil and gas exploration firm Taipan Resources commenced exploration in north east of Kenya last month. British explorer, Tullow Oil has also continued operations in Kenya despite price slump. Aiden Heavey, the company’s founder and CEO, said, last year that the company would not succumb to market pressures.
Results from a survey of 30 economists by Reuters, in 2014, projected Brent crude to average $74 per barrel this year and $80.30 in 2016.
