Less Supply Drives Oil Price Surge
In a surprising show of unity, the United States, Russia, and Saudi Arabia agreed to cooperative cutbacks in oil production, at least for the near future. Markets responded enthusiastically to the improved outlook for oil prices, pushing up spot prices across various oil benchmarks.
WTI crude, which tracks oil prices across the United States, was up $2.14 to $48.40 around noon on Tuesday October 6th. The upsurge reflected a positive change of more than 4.6%, driving oil prices to their highest levels since September 3, 2015.
Analysts first noticed the supply constraint last week when data revealed the closure of 26 U.S. oil rigs. Fewer rigs translate to less oil on the market, thus leading to higher prices. (Source: Oil surges on US output forecast, OPEC comments, CNBC, October 6, 2015.)
Then on Tuesday, the U.S. Energy Information Administration disclosed a forecasting showing that U.S. oil production will fall in the second half of next year.
Markets were eagerly awaiting a saving grace for oil prices.
Oil Price Forecast Jumps on Show of Unity
Another important feature of the EIA report was how much oil is needed for 2016. The expected global demand for oil has been raised by 100,000 barrels to 1.41 million barrels per day.
In other words, demand is rising while supply is falling.
Other factors are also affecting the outlook for oil prices. The Secretary General of OPEC made a speech in London suggesting OPEC and non-OPEC oil producers should work together to taper supply.
Secretary General Salem el-Badri’s comments were made at the Oil and Money conference, a gathering of powerbrokers within the energy industry. In the speech, he said “less supply in the very near future. Less supply means high prices.” (Source: OPEC chief: Oil prices will rebound as investment is slashed, MarketWatch, October 6, 2015.)
By common consensus, analysts estimate global investment in oil and gas will fall more than 20% through 2016, making it the largest decline in history.