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Neutral Zone production to resume gradually

Published Wednesday, March 30th, 2016

If yesterday’s price action is anything to go by then one might conclude that after a two-month rally the top has been reached earlier this month and the risk is now on the downside. Not even a weaker dollar triggered by a cautious Fed chair as discussed below was able to support the oil market. WTI lost $1.11/bbl and Brent $1.13/bbl yesterday. Heating Oil settled 246 points lower and RBOB 142 points down.

The main reason behind yesterday’s weakness is the report of an agreement between Saudi Arabia and Kuwait to restart production at the jointly operated Khafji oil field. This field which is in the Neutral Zone was shut down in October 2014 due to environmental concerns when it produced about 300,000 bpd. Although the exact date of the restart has not been specified the news itself was enough to send prices lower. The price reaction to a potential 300,000 bpd of extra supply shows that regardless of the upcoming OPEC/non-OPEC “freeze” meeting or falling US oil output the market simply does not need additional barrels if it is to have any hope of re-balancing. It must however be noted that a production freeze agreement at January output levels would force Saudi Arabia and Kuwait to reduce oil output elsewhere in order to accommodate the gradual rise in production across the Neutral Zone. The other oil field in the Neutral Zone, the 220,000 bpd Wafra, remains closed.

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Posted by Tamas Varga

Tamas Varga has been in the oil industry since 1992 and with PVM for 18 years. During his time in the industry he has gathered a range of experience in the oil markets. At PVM Tamas is in charge of data collection and analysis.