Oil prices at $60 still a distant prospect

JEDDAH: Oil prices have improved significantly since the middle of July, and the Brent benchmark has stabilized at over $50. Yet oil prices reaching $60 by the end of this year is by no means a certainty.
Prices have recovered due to bullish factors such as the steep fall in US inventories over the last five weeks, but there are many bearish factors that have started to emerge, daunting investors in futures contracts on both sides of the Atlantic.
The main three bullish factors that will exert downward pressure on prices in the coming weeks are the expected increase in US shale oil production, the slowdown in Chinese economic activities and crude consumption, and the difficulty that members of the Organization of the Petroleum Exporting Countries (OPEC) face in adhering to their pledged cuts in supply.
The worry over shale oil production is back again after the US Energy Information Administration (EIA) reported on Aug. 14 that it now expects the production of shale oil to reach a record level in September of 6.15 million barrels per day (bpd).
The rise in US shale oil production is believed to be the result of the improvement in oil prices as many of the producers have a breakeven price of $50, according to an analysis by Reuters’ market analyst John Kemp.
The International Energy Agency (IEA) warned on Aug. 15 that it might be difficult for OPEC to rebalance the market this year due to US shale oil. Bringing oil inventories down to five-year average will be difficult, Neil Atkinson, head of the IEA’s oil markets and industry division, said on Aug. 15 in a Bloomberg TV interview. “Rebalancing is a stubborn process,” he said.
The second major issue is the Chinese slowdown. In July, China’s economy posted its worst showing this year as curbs on property, excess borrowing and industrial overcapacity began to bite. The world’s second-largest economy faces some headwinds this year as the effects of deleveraging and industrial capacity cuts kick in. Industrial output rose 6.4 percent from a year earlier in July, versus a median projection of 7.1 percent and June’s 7.6 percent.
Last but not least, OPEC is still struggling with meeting its cuts targets. Latest figures from the organization’s secondary sources showed that the group’s compliance with the cuts of 1.2 million bpd stood at 87 percent in July. Without OPEC adhering to the full cuts, bringing down the inventories to the five-year average may take longer than expected.