We published an article, What Is Keeping The Oil Prices Low? in February that highlighted the reasons behind the current downturn in crude oil prices and its impact. The following is an update on that material.
The June WTI is trading close to $48.35, while the July Brent is at $49.11, implying an improvement by about 49% from our last post. At any point in time, there is a complex dynamics behind crude oil trends that combines the impact of long and short-term factors. Read How is Oil Price Really Determined?
The Supply Side
OPEC has released its May 2016 report and has predicted non-OPEC oil production to come down by 0.74 million barrels per day (mb/d) this year. The OPEC think-tank is exploiting its dominant market position and financial bandwidth to wait out its rivals.
Accordingly, it has given no indication of any production cuts and the results are evident. The biggest impact of the low price regime is expected to reflect in the U.S. With profits under severe pressure, the supply is likely to contract by 0.43 mb/d in 2016. As many as 69 U.S. shale oil companies have already filed for bankruptcy in the current year alone. China, Mexico, UK, Kazakhstan and Colombia are also expected to reduce production in 2016. On the other hand, Canada, Brazil, Russia and Malaysia might increase their output. In addition, Iran has ramped up its production faster than anyone thought. Nevertheless, the oversupply is believed to be shrinking and these cyclical headwinds are supporting the current prices.