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Supply outages supported oil prices in May

Published Thursday, June 2nd, 2016

The oil market is undoubtedly in an uptrend as this year the five main futures contracts have closed higher every month apart from January. Bulls will be eager to point out this fact and would argue that fundamental developments in May did nothing to dent their confidence. Bears, on the other hand, would emphasise that although oil prices closed higher last month, the gains were far less than in previous months. WTI gained 7% on the month and Brent closed 3.2% higher. Heating Oil settled 8.7% up and RBOB a mere +1.9%. They would argue that the enthusiasm we have seen during the last four months is clearly running out of steam.

There were two events in May that were of great importance. One of them is undoubtedly bullish and the other one is potentially bearish. The bullish event was the unexpected supply disruptions in Canada and Nigeria. It was widely publicised that the combined outages amounted to 3-4 mbpd which is probably correct if you consider falling production in Venezuela and the lack of progress in ramping up Libyan oil output. However, as far as the month-on-month disruption is concerned, it is closer to 1.5-2 mbpd. This is still a significant amount even in an oversupplied market and these outages are the reason why oil prices continued their upward journey last month.

Whilst production problems had a supportive impact on oil prices in the short-term, the changes in the Saudi oil leadership could potentially have a negative price impact in the medium to long-term. After serving more than 20 years as the Kingdom’s oil minister, Ali Al-Naimi was replaced at the beginning of May by the Chairman of the Saudi Arabian Oil Co, Khalid Al-Falih, a close ally of the Deputy Crown Prince, Mohammed bin Salman. Although the newly appointed oil minister was quick to reassure the market that he intended to continue his country’s oil policy, his appointment comes amidst sweeping changes in the country. These include the potential sell-off of a minority stake in the country’s national oil company, efforts to re-balance the Kingdom’s finances and implementing the Vision 2030 project which is aimed at lessening its dependence on oil revenues.

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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.