INQUISITR.COM / News & Politics

Oil Prices Hit $50 A Barrel For The First Time In Seven Months, But Will They Stay There?

By Andrew Galbreath
Published on: 08:35 PST, May 26, 2016

Oil prices briefly rose above $50 a barrel for the first time this year on Thursday due to supply disruptions and increasing global demand.

Brent crude, the global oil benchmark, traded up to $50.19 during morning trading on May 26 for the first time since November, following data showing that U.S. stockpiles of crude had fallen, largely as the result of supply disruption from wildfires in Canada, as well as militant attacks in Nigeria and Libya, which have removed millions of barrels per day from production. Brent crude has now risen 80 percent since it hit its lowest prices in 13 years in January, when oil was $28 a barrel. The new price increase has raised hopes that the oversupplied global market is finally reaching an equilibrium.

The announcement came after U.S. crude oil inventories fell by 4.2 million barrels to 537.1 million barrels in the week of May 20, according to the Wall Street Journal.

“Thursday’s gains came after inventory data released by the U.S. Department of Energy on Wednesday showed a 4.2 million barrel reduction in oil stocks. Analysts polled by The Wall Street Journal had expected a decrease of only 2.5 million barrels. A weaker U.S. dollar also supported prices on Thursday. The Wall Street Journal Dollar Index, which tracks the greenback against a basket of other currencies, fell 0.2%. As oil is priced in dollars, it becomes more attractive for holders of other currencies as the dollar falls.”

Canada is the biggest supplier of crude oil to the U.S., and supply disruption from the wildfires around the oil sands in Alberta knocked out about a million barrels of oil production a day for weeks. Attacks on pipelines by militants in Nigeria represented a loss of an additional 800,000 barrels a day. U.S. oil production itself is down 500,000 barrels a day from the start of the year, and outages in several Latin American countries such as Venezuela cut the global supply by about 3.4 million barrels a day for the month of May.

Meanwhile, demand has been steadily on the rise because of the impending summer driving months. Although it is too early to tell whether U.S. oil stockpiles will continue to draw down after the nearly uninterrupted increases since the middle of last year, the rise in price and decline and inventory has re-awakened bullish sentiments. The move above $50 a barrel was seen as a key moment by many analysts and market players, providing a much-needed psychological boost to the oil market.

“Now we have $50 that is the reference point,” Bjarne Schieldrop, SEB’s chief commodities analyst, said to the Wall Street Journal. “So when it dips below 50, that will be seen as a buying opportunity.”

However, the news came with reservations that higher prices could just encourage producers to revive operations and ship more supply to an already oversupplied market, according to MarketWatch.

“Crude only got to rest on its laurels for a few hours, before analysts pointed out the flaws in the rally to $50 a barrel. Stronger oil prices may actually be the one thing that can send prices sliding again. Sounds counter-intuitive? Actually, it’s not. Higher prices could encourage more producers to turn up output — particularly the more cost-sensitive U.S. shale producers — and present the world with another wave of oversupply. Which was how we got into this low-oil-price mess in the first place.”

Ominously, Brent crude struggled to maintain the $50 mark on Thursday, and prices quickly dipped back below $50 just as the sustainability of the oil rally came into question. Analysts pointed out how prices are higher right now because short-term disruptions have offset record production by Saudi Arabia and Iran, and that exports from those countries will likely resume soon. The real question will be the meeting of the Organization of the Petroleum Exporting Countries (OPEC) next week in Vienna, and whether it will result in an agreement for a production freeze to drive up prices.

Anticipation of the June 2 meeting helped prices, but continuing rivalry between Saudi Arabia and Iran has left few with optimistic appraisals the meeting will result in any meaningful effort to freeze or cap production. Iran’s exports have already reached pre-sanctions levels, at 2 million barrels a day, and the National Iranian Oil Company has stated they are expected to get up to 2.2 million a day during the summer. A rise in U.S. production could also trigger a major fall in prices.

Goldman Sachs raised their forecasts earlier this month, saying they now expect oil to consistently hover around $50 a barrel for the rest of 2016, and even hit $60 by the end of 2017. Demand for crude has been greater than expected from countries with large economies such as the U.S., China, India, and Russia.

[Photo by Joe Raedle/Newsmakers/Getty Images]

Share this article: Oil Prices Hit $50 A Barrel For The First Time In Seven Months, But Will They Stay There?
More from Inquisitr