RIYADH: Crude markets are presenting a hazy and uncertain picture. They have strengthened — to a five-month high — and yet the direction is far from clear.

Geopolitical tension in the Middle East, slowing US production growth, a softer US dollar and strong economic indicators in Europe and Asia have been lending support to oil prices, which have already surged by nearly $10 a barrel this month.

But is this a turnaround? Has the bottom arrived? Is this sustainable? The debate is on.

Some still continue to warn. “It’s not quite a bright picture from the fundamentals side,” said Eugen Weinberg of Commerzbank. “The hard facts are rather speaking for low prices.”

The world’s biggest oil exporters in Opec (Organisation of the Petroleum Exporting Countries) are pumping almost 2 million barrels per day (bpd) more crude than required. Saudi output is touching new heights, producing some 10.3m bpd of crude in March, eclipsing the previously recorded top output of 10.2m bpd in August 2013.

Michael Coleman, chief operating office at RCMA Asset Management, hence appears surprised by the rush among some investors to bet on an increase in oil prices. “From our perspective, we don’t think enough damage has been done yet to current production,” Coleman was quoted as saying. “I think the markets are going to be captured by that marginal cost of supply and so we’ll be in the school of 40-60 (US dollars) for WTI (West Texas Intermediate) for some period of time.”

Jorge Montepeque, global editorial director at Platts, concurs, saying that even though the number of operational oil rigs has fallen, it’s not a foolproof indicator that the supply glut is being cleared. Companies will be able to continue to produce even at lower prices.

But the recent gains have prompted others to raise their projections. Societe Generale has raised its 2015 average price forecast for Brent by $4.33 to $59.54 a barrel and for US crude by $4.28 to $53.62.

Roelof van den Akker, a chartist at ING Wholesale Banking, told Matt Clinch of CNBC that he expected the price of Brent to reach $72.40 a barrel in the near future. “I would not be surprised by further upside potential in Brent oil towards $78 to $80.”

Hedge funds and other money managers are also eyeing a sustainable rally. Speculators increased their net long positions for Brent futures and options to around 263,578 contracts in the week ending April 14, meaning they were using financial products to bet on the price rising.

This number was the highest level since records began in 2011, Reuters reported. BP’s former CEO Tony Hayward too is now stressing that Opec’s strategy of maintaining the oil glut has helped drive down prices, crushing the US shale boom. Speaking at the Financial Times’ Global Summit in Lausanne, Switzerland, he said the average global price will soon be around $80. “The supply chain in the US is being decimated.”

US shale oil production, the source of the current battle among producers for market share, is expected to be flat this month and will decline next month for the first time in 4.5 years, he added. Hayward also dismissed the view that shale oil is the new swing producer. “Even if prices recover, the ability of the supply chain to respond will be severely impaired. It will take several years to get back to where were.”

Paul Horsnell, head of commodities at Standard Chartered, said there’s very little spare capacity among global oil producers, and any minor disruption could trigger a rapid turnaround in the market’s view. He said that spare capacity is less than 2 per cent of total oil production capacity.

Opec’s spare capacity could halve to as low as 1.7m bpd this year, far below the level of more than 10m bpd in the 1980s, when Saudi Arabia last opted for market share over price.

Therefore, some feel that Opec’s ability to cope with an unexpected surge in demand is diminishing fast. “The very low level of spare capacity carries a risk of a price spike in the not too distant future,” PIRA Energy Group, an international consulting firm, said.

Published in Dawn, April 26th, 2015

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