smh-The biggest oil price surge in 25 years appears mainly driven by supply-side factors, according to analysts, despite the rebound in global equity markets once again igniting demand for commodities.
Lower-than-expected US oil production, rumours of OPEC cutbacks, and a fire at Canadian Oil Sands synthetic crude oil plant are among the supply-side factors hitting the commodity, which has rocketed over the past week.
US West Texas Intermediate crude was trading at $US47.85 on Tuesday afternoon, over 26 per cent higher than its low last week of $US37.93. At its peak it was 27.5 per cent higher – the most over three days since the Gulf War in August 1990.
The rise comes after oil hit six-year lows in August following China’s sharemarket turmoil.
Meanwhile on Tuesday, Brent crude was trading at $US52.76 – 36 per cent higher than its low last week of $US42.29.
“I would say it’s a 70 per cent supply issue,” said ANZ head of commodities Mark Pervan. “We think supply is the big driver.”
“US stocks last week surprisingly dropped 5 million barrels. That would have been a warning shot or a guide that we’re starting to see some supply discipline from high-cost supply.
“$US40 a barrel is going to be unsustainable for the bulk of US shale oil producers,” said Mr Pervan. “I’m not surprised it popped $US10 a barrel pretty quickly. You’re going to get the market bouncing on the fact it’s oversold.
“Everyone will be watching, very closely, next week’s US inventory data.”
The rally was also fuelled by US government figures showing the US pumped just short of 9.3 million barrels a day in June, down by 100,000 from a revised May figure, he said. The Energy Information Administration said the June data was 250,000 barrels a day below what it had estimated just a few weeks ago.
Mr Pervan said he expected Brent to be at $US50 at year’s end and West Texas Intermediate at $US45.
Nelson Wang, oil analyst with CLSA in Hong Kong, said the fire at Canadian Oil Sands was a key factor. “We think it’s the newsflow from Canada because of this fire,” he said. “We don’t know how long and how much production will be lost but the consensus now is that production will be suspended for a couple of months.”
The piping system at Canadian Oil Sands’ Mildred Lake upgrading facility caught fire last Friday, forcing the joint-venture project to stop producing fully upgraded synthetic crude oil.
The EIA revisions were another key factor, said Mr Wang. “US production is not as strong as the market expectation,” he said.
“I think the EIA adopted a new methodology in calculating oil production so that’s more bearish news for output.”
Mr Wang said the rebound in prices would keep many US shale oil producers afloat.
“Oil prices are rebounding so I don’t think the US will cut back,” he said. “At today’s prices a lot of the US shale producers are still profitable and will remain that way.
“We do expect US shale output to slow down a little bit but it will still be increasing for the next few years. That’s the big overhang in the oil price.”
He tipped that Brent crude would average $US55 a barrel in 2016 and $US65 a barrel in 2017.
NAB analyst David deGaris noted the rise in the oil price was based on “little to no fundamental news”, signs of a “classic short squeeze”.
Nor could the Organisation of Petroleum Exporting Countries be blamed, he said.
“There were reports of an OPEC bulletin indicating some preparedness to talk to other producers to achieve fair prices, but this bulletin hasn’t been the key mouthpiece for OPEC before.
“In any case, OPEC output has continued to increase a little.”
Some Australian oil stocks have followed the commodity upwards in the past week, with Woodside up from $29.70 to $31.98 and Oil Search $5.67 to $6.80.