Oil Is Back

In case you haven’t noticed, oil prices are staging a strong recovery towards 50 USD per barrel.

That’s almost twice the price of February, when oil dropped to 26 USD/barrel – so be prepared for higher costs when your car needs the next fill-up.

This remarkable price movement of the ‘black gold’ within a few weeks can also be seen as a lesson that organized political attempts to ‘manage’ a price on markets are useless.. All that counts is an unexpected change in the balance of supply or demand.

Since demand for oil was fairly stable for quite some time, oversupply was the main reason the price per barrel of oil fell from 115 USD in summer 2014 to 26 USD in this year’s winter.

Therefore, desperate producers, mainly Russia and OPEC members like Saudi Arabia tried several times to ‘manage’ the oil price by freezing production levels. Just a month ago, at a meeting in the Qatari capital Doha, the last attempt to achieve an ‘oil-deal’ failed. Worse, the next morning, crude oil fell as much as 7%.

The real drivers for the recent jump in crude-prices were not ‘managed’, but unexpected and almost simultaneous supply disruptions in Canada and Nigeria.

In Canada, the oil-sands production has been hit by wild fires with new evacuations of thousands oil workers on Monday, two weeks after the entire population (80’000) of Fort McMurray, the heart of Alberta’s oil sands region, had to evacuate. The fires have forced major oil companies to shut down some operations and cut production by about 1,2 million barrels of oil per day. That’s a massive production cut. Canada produces about 4,4 million oil-barrels daily, making it the fifth largest oil producer in the world.

In Nigeria, output has fallen to a 20-year low after militant attackers disabled parts of Nigeria’s oil infrastructure with Chevron as a main target. The ‘Niger Delta Avengers’ reportedly want locals to have more control over the oil resources in the region and threaten to ‘zero the economy’. Nigeria’s output is currently reduced by 300’000 barrels a day.

This sudden supply disruption – forced by nature and terror – has led oil-traders to bid prices much higher over the past few weeks.

And it changed the picture completely; up until a month ago, the perception was there was too much supply. But the ongoing outages from Canada and Nigeria are now tipping the markets.

In a fresh report, Goldman Sachs suggests that the market has likely shifted into deficit in May: ‘The physical rebalancing of the oil market has finally started’. In addition, stronger demand from India and China also helped support oil prices. That would end a two-year run of oversupply.

Still, the new supply/demand balance could still be disrupted again.

Venezuela is offering oil at the biggest discounts in years as the country fights to defend its market share.

Many US shale producers have suggested that a price around 50 USD/barrel will be enough for them to redeploy rigs in order to start drilling again, since the largest 50 publicly-traded oil companies would breakeven at 53 USD/barrel.

And Saudi Arabia could increase output by around 10% a day if it wanted to. However, recent changes at the top of Saudi’s oil ministry and the upcoming IPO of state oil company Aramco make this scenario currently less likely.

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Fires in Canada: Fort McMurray’s 80’000 residents have been forced to flee and oil-sands production is sidelined.

Attacks in Nigeria: One target was Chevron’s Valve Platform, a major connecting point where all other platforms link up.