July 04, 2016
Can you believe we’re already halfway through the year? It won’t be long until the nights start drawing in! The first 6 months of 2016 have been fairly remarkable in oil terms with the price of oil doubling in a short space of time. At $50 per barrel, the oil price still seems remarkably low compared to the highs of the recent past, but imagine if house prices had doubled in the same period? Cars or even a loaf of bread? Then the fury of the public would be well and truly provoked, and yet this latest surge in oil prices has barely elicited a murmur. The fact is that $25 per barrel was probably too low a price to last for long. To some extent what we have seen is a rebalancing of supply and demand and an oil market that (through its recovery) has acknowledged that the 2014-15 fall in the value of crude was probably overdone.
Between 2010 and 2015, US oil production rose from 6m barrels per day (bpd) to 9m bpd. But in the first half of this year, that figure has dropped to 8m, meaning a full 10%+ of US production has been taken off the market. At the same time, the massive supply disruptions in Nigeria are beginning to bite, with estimates of up to 500K bpd being stolen by rebels (that’s the equivalent of circa 60% of annual UK oil production in the North Sea).
To counter these major drops in oil supply, Iran has rapidly increased their oil production. Experts had estimated that it could take more than 12 months for Iran to get back up to its pre-sanction production levels of 4m bpd. Remarkably it has taken less than 3 months and this has added a massive 1.3m bpd onto the markets. If you take the extra 1.3m barrels from Iran and then net off the reductions from the USA (1m bpd) and Nigeria (0.5m bpd), then we have a minor supply / demand imbalance balance of -0.2m bpd. This figure in isolation would not be large enough to send oil prices rocketing upwards, particularly as the situation has to be viewed in the context of a market already glutted with oil. But when we factor in a consumption increase of 1m bpd (for the final time, demand for oil is increasing every year…) and now the maths looks decidedly different. Supply / demand is currently out of kilter to the tune of negative 1.2m bpd and this has easily been enough to push prices back up quickly since the beginning of the year.
What can we expect for the rest of 2016 and into 2017? If prices fall to $25 per barrel, oil exploration becomes commercially unviable in most forms and production stops (with many producers going bust to boot). This takes the product from the market and prices start to increase. At $50 a barrel, supply and demand start to balance out and if this status quo could be maintained, both producers and consumers would be satisfied. But that isn’t how markets work when worldwide demand for the product in question is constantly increasing. Pressure starts to build and prices continue to rise to the point where they are attractive enough for production to accelerate.
With the recent increases in oil prices, we would recommend that you check your tank levels, and if you have room, it may be worth topping up your Heating Oil now.