Crude prices continued to rise on Tuesday, with WTI closing at $53.98 (U.S.), its highest since Dec. 14, and Brent hitting $59.10. But analysts say inventories are building at key locations, such as Cushing, Okla.Daniel Acker/Bloomberg
Even as crude prices continue to firm up, there were new warnings Tuesday that producers face a bumpy road over the next two years, particularly as Iran looks to re-enter the global marketplace.
The draft nuclear agreement with Iran could shave as much as $15 (U.S.) off the price of oil in 2016 if an easing of sanctions against the OPEC state allows it to ramp up exports as early as the end of this year, the U.S. Energy Information Administration (EIA) said Tuesday. The U.S. agency said Iran has about 30 million barrels of crude in storage that it can move quickly into export markets as it begins to raise production.
As well, Goldman Sachs issued a report saying there is still too much crude in the market and low prices are required until well into 2016 in order to rebalance the market.
The report said that if a comprehensive deal is reached this summer, the flood of Iranian exports would lower international oil prices by between $5 and $15 a barrel, depending on the pace at which sanctions are removed, the country's ability to ramp up production and the willingness of other OPEC members to yield market share to Iran. In the absence of a deal, the EIA expects Brent crude to average $65 a barrel in the fourth quarter of this year and $75 in 2016, while West Texas intermediate (WTI) will average $58 in the fourth quarter and $70 in 2016.
Crude markets have stabilized somewhat from the deep slump that began last summer and accelerated after the Organization of Petroleum Exporting Countries refused at its November meeting to cut production to ease a growing glut.
Investors drove up crude prices Tuesday, with WTI gaining $1.84 – or 3.5 per cent – to $53.98 a barrel for its highest close since Dec. 14. Brent was up 98 cents to $59.10. In both cases, the higher prices extended gains made last week and through March.
But analysts say markets continue to be oversupplied, with inventories building at key locations, such as Cushing, Okla. Saudi Arabia produced more than 10 million barrels a day in March, with OPEC as a whole well above its 30-million-b/d target. And non-OPEC production isn't falling nearly as quickly as many had expected, given the slumping prices and the drop in the North American rig count.
"I suspect in today's oil market, investors were hearing what they wanted to hear or seeing what they wanted to see," said Tim Evans, energy futures trader at Citigroup Inc. "We're in a market where the price action says one thing and the underlying fundamental data say something else.
"Investors are eager to declare that there is a bottom in this market … But if OPEC continues to produce at the March output level, that's going to translate into an ongoing surplus not just through the second half of the year but on through 2016."
Saudi Arabia's oil minister, Ali al-Naimi, said Tuesday that the kingdom is prepared to work with other major producers to rebalance the market, but would not act alone. He said he expects prices will rise in the coming months. Saudi Arabia long has said it would not move unilaterally to reduce output while high-cost producers in the United States and Canada grabbed market share.
The U.S. has become the world's largest producer of crude and natural gas liquids, at close to 15 million b/d. Its advantage over its two largest competitors, Russia and Saudi Arabia, widens when natural gas production is included. As a result of its recent boom in shale gas and tight oil, the U.S. now produces nearly twice the amount of oil and natural gas as Saudi Arabia, the EIA said Tuesday.
U.S. crude production is expected to peak soon as a result of the decline in drilling; Mr. Evans said he doesn't expect production there to fall rapidly but will more likely see a gentle decline that won't be enough to fix the global oversupply.
In a report, Goldman Sachs analysts suggest the North American market will begin to draw down swollen inventories in the second quarter as refineries gear up for the summer driving season, but by fall, that process will reverse itself and stocks will begin to rise again, putting further pressure on prices.
"As a result, while the decline in the U.S. rig count has been faster than we expected, it remains insufficient in our view to balance the U.S. market in 2016," the analysts wrote.