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As the price of crude oil rose above $50 a barrel for the first time this year, traders are still split over whether the near 80 per cent rally since prices bottomed in January can keep going.
Here are five things to watch that could dictate the next move in the price of Brent crude and US benchmark West Texas Intermediate.
1. Nigeria and other troubled Opec producers
The latest leg-up in prices comes as output in what was Africa’s largest producer has fallen to the lowest level in more than 20 years.
Militant attacks on oil-producing facilities, pipelines and terminals in the Niger Delta have slashed the Opec member’s output to less than 1.4m barrels a day — a drop of more than 40 per cent from its recent peak — and reignited fears of prolonged unrest reminiscent of the uprising between 2006 and 2009.
A group calling itself the Niger Delta Avengers has claimed responsibility for many of the attacks which came as President Muhammadu Buhari cut payments to militant groups in the oil-rich but economically disadvantaged state, which were first instigated as part of an amnesty in 2009.
The group has threatened to keep targeting facilities, leading companies such as Shell and Chevron to evacuate some of their staff.
The pick-up in violence is arguably an indirect consequence of the two-year oil price crash, which has roiled the budgets and politics of many weaker producers.
Libya’s output remains depressed, despite a provisional agreement between competing governments in the west and east of the country to restart shipments from the port of Hariga.
In Venezuela, another Opec member, President Nicolás Maduro has declared a 60-day state of emergency.
2. Supply disruptions
Supply disruptions are not isolated to weak Opec countries. Wildfires in Canada’s oil-producing Alberta province have knocked out about 1m b/d or more than a fifth of the country’s production.
Oil stocks in the US, by far the biggest destination for Canada’s oil exports, fell by 4.2m barrels in the week to May 20, the biggest decline since April as imports fell.
Supplies are also falling due to the lower price. Output in the US, which drove the creation of the glut in the years preceding the price crash, has already fallen more than 500,000 b/d from its 9.7m b/d peak 13 months ago.
China, a top-five producer and still a major centre of demand growth, is expected to see output slip by more than 3 per cent, or 140,000 b/d this year, according to Opec’s monthly report. In April it slipped to just 4.05m b/d, the lowest since August 2012.
All told, analysts put total supply disruptions at more than 3m b/d, helping to put the market into or close to deficit for the first time in more than two years.
That has led Goldman Sachs, one of the most bearish banks on commodities over the past two years, to raise its price forecasts for the second quarter.
“The physical rebalancing of the oil market has finally started,” said Goldman this week. “We believe the market has likely shifted into deficit in May.”
3. Saudi Arabia
Is Opec kingpin Saudi Arabia going to raise output? That is perhaps the biggest question dogging oil markets in the medium term. With the replacement of veteran oil minister Ali al-Naimi earlier this month cementing Deputy Crown Prince Mohammed bin Salman’s control over the oil sector, traders are nervously watching for any sign of higher output from the desert kingdom.
Saudi Arabia is the only country with significant spare capacity and has made clear it believes the lowest cost producers should be the ones to pump most.
But after raising output from 9.6m b/d in late 2014 to a record 10.6m b/d last June, its output has been remarkably steady. Since August 2015 production has averaged 10.2m b/d, barely wavering by more than a few thousand barrels each month.
Energy Aspects, a London-based consultancy, argues that Saudi Arabia is in no rush to swamp the market. Raising output closer to 11m b/d would require additional cost and drilling rigs.
“While it would like to be prepared for a higher call on its crude as non-Opec supplies fall fast, increasing capacity takes time,” Energy Aspects said in a note.
Complicating the picture, the country’s crude output normally rises in the summer months to meet peak electricity demand. The market may need to wait a few months to get a clearer idea whether Saudi Arabia will scale back its summer output as it did last year or keep the taps open.
With the public listing of a small stake in state oil company Saudi Aramco as early as next year, new oil minister Khalid al-Falih has promised “stability” in policymaking, but also emphasised the country’s ability to use its “maximum sustainable capacity” to meet customer demand.
Mr Falih’s comments will be closely watched ahead of Opec’s meeting on June 2, his first in charge as Saudi Arabia’s oil minister. While no change in the cartel’s oil policy is expected, his tone and approach to the group will be analysed by the industry to understand how Saudi Arabia’s relationship with Opec may develop.
4. US shale
US average annual crude oil output is forecast to fall from a peak of 9.4m b/d last year to 8.2m b/d in 2017, according to the Energy Information Administration.
But higher prices have already seen the EIA trim the size of the drop by 100,000 b/d since prices were languishing below $40 a barrel. Closer to $50, the outlook is less clear.
During the two-year price rout companies have been squeezing down costs. Some have said they could start drilling again above $50 a barrel. But the impact on the broader market may come even quicker through the futures market.
After many experienced a near-death experience, banks will be asking companies to hedge as soon as the price is high enough to keep their operations (and debt repayments) going.
That will probably contribute to slowing the rise of prices as companies sell forward their production.
5. Hedge funds
When oil prices bottomed below $30 a barrel in January, hedge funds started buying. In the first 19 weeks of the year, money managers were net buyers of Brent crude oil, accumulating a near record position equivalent to 420m barrels of crude.
The move was largely replicated in US benchmark WTI where net longs — the difference between bets on rising and falling prices — rose to almost 250m barrels of crude.
This record combined bullish position, however, has been trimmed in two out of the past three weeks, before the supply disruptions in Canada and Nigeria reignited buying. Some funds have been taking profits after the huge run-up. That has sparked some caution in case a trickle of profit-taking should turn into a flood, exerting selling pressure on the market.
Others see the potential for more funds to buy in. While the number of speculative barrels has surpassed peaks last seen in mid-2014 — when oil was still well above $100 a barrel — the amount of cash funds have at play in the market is far lower because of the drop in price.