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Impressive 1H oil price rally despite global stock build

Published Monday, July 4th, 2016

Oil had a stellar performance in the first half of the year, especially when compared to that of the stock markets. Looking back at the major events and developments of the last 6 months that led to a hefty global stock build one could conclude that this impressive result is not justified. If you, however, take into account that prices still averaged below the 2015 level the performance is vindicated despite global supply exceeding demand.

The most significant events of 1H 2016 are as follows:

  1. The lifting of the 40-year ban on US crude oil exportswas supposedly bullish as it was expected to decrease US crude oil inventories. Instead crude oil stocks have increased by 39 million bbls or 8.1%. US crude oil exports which averaged 476,000 bpd in the first half of 2015 fell to 421,000 bpd a year later.
  2. Co-ordinated efforts by OPEC and non-OPEC producers to support the oil market have failed. Efforts to secure an oil production freeze deal at the Doha meeting in the middle of April were scuttled by Saudi Arabia after it insisted on Iranian participation.
  3. Curiously, the Doha disaster failed to send oil prices significantly lower which was largely due to unexpected supply disruptions. It all started with Kuwaiti oil production falling by 1.9 mbpd in April. This was followed by the Canadian wildfires where a total 30 million bbls of production was lost in May and June. Add to that the regular pipeline bombings, production shut-ins and force majeure in Nigeria that sent the West African country’s production to a 22-year low and you end up with a rather bullish cocktail, at least for the second quarter of the year.
  4. Expected supply outagesalso played their part in the recent price rally. Libya’s production has not been able to recover during the last six month’s whilst low oil prices have significantly cut back US and Venezuelan oil production. The former has averaged at 8.976 mbpd in 1H 2016, 400,000 bpd below the year-ago level and output fom the latter has dropped by 170,000 bpd since last December.

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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.