JEDDAH: The oil market is moving away from the bear market it entered recently. The bear market is a term used to describe the situation where the oil price loses 20 percent of its value over a sustained period of time. However, bullish sentiment sees a pick-up in the market and prices have been edging up ever since Organization of the Petroleum Exporting Countries (OPEC) and non-OPEC producers met in Russia to review the market conditions and the compliance of the 24 producers who are part of the global production-cuts agreement. Oil prices in both London and New York settled above $50 on July 31 as the bullish sentiment returned. Here are some of the factors that are driving the market upward in past few days:
- The drawdown from US oil stocks has continued at very high rates during the last three weeks. Stocks went down by 7.21 million barrels in the week ending July 21, more than double the amount expected by the market.
- After a period of high oil exports, some OPEC countries have pledged to reduce shipments in the coming few months. Saudi Arabia will cap exports at 6.6 million barrels per day (bpd) in August, 1 million barrels below the daily average a year ago, while the UAE plans to cut exports to its customers by 10 percent in September.
- Oil spreads are narrowing and making storing crude less feasible. The spread for Brent between September and October surged to backwardation of $0.30 on July 28, ahead of the expiry of the contract on July 31. Contango is when future oil prices are higher than today’s, while backwardation is the opposite. A narrowed contango or a backwardation makes it unprofitable for traders to store crude.
- Slowdown in drilling activities in the US and disappointing financial results for shale oil companies in the second quarter of the year. Many shale firms have announced cuts in their investment plans this year, which casts doubt on an increase in output from the US in the second half of the year.
- Disruption in supply from Nigeria, and fluctuation in Libyan production. Both Libya and Nigeria were exempted from the OPEC cuts deal due to their political and operational instability. The market reacted negatively in recent weeks to news of their continued levels of production. However, both countries agreed with other producers in Russia to cap production as soon as it becomes stable. Libya, which now produces a little above a 1 million bpd, will cap at 1.25 million bpd, while Nigeria agreed to put a lid on output once it reached 1.8 million bpd. Both countries may not be able to reach their targets until later this year.
