Oil market rebalancing on horizon
Opec also sees crude supply glut shrinking in second half of 2016
The oversupplied oil market is on track to rebalance later this year as economic growth spurs global demand against a backdrop of falling US production and supply outages in Nigeria and Canada speeding up the erosion of a glut.
According to the Organisation of the Petroleum Exporting Countries' latest monthly report, commercial crude stocks declined by eight million barrels in May. By contrast, global stocks increased by 12 million barrels in March and April, and by 19 million barrels in February.
The chronic glut of oil forced market prices to their lowest point in 12 years in January, but as the excess supply dwindles, prices have rallied higher. Oil has risen to $50 a barrel from the 12-year low of $27 in January as the outages curb excess supply. The Opec's reference price for May averaged $43.21 a barrel, a gain of $5.35 compared to the previous month.
"Provided that there is a clearer picture regarding oil supply and demand, the expected improvement in global economic conditions should result in a more balanced oil market toward the end of the year," the 13-member group said on Monday.
The forecast said global oil demand growth would continue to rise by 1.20 million barrels a day year-on-year.
It said India would drive oil demand growth with China adding some support to that demand growth. It projected that demand for Opec crude in the latter half of 2016 was expected to average 32.6 million bpd, giving the group room to expand its current oil output.
While demand for Opec crude was forecast to rise, the group repeated its prediction that markets would continue to see a contraction in supply from rival non-Opec members to the tune of some 140,000 barrels a day compared to the first half of the year and almost one mbd lower compared to the same period last year. However, it cautioned that there is still a massive global supply overhang.
"I have always maintained that the oil market has been bullish since January. There is no doubt that the oil price has gone up faster than our expectation but I think we will hear a lot more talk now about prices hitting $55 or even $60 mark till the end of the year," Mihir Kapadia, chief executive officer of Sun Global Investments, told Khaleej Times.
"It will be important to note that if it goes too quickly there will be auto-corrections. People often talk about oil as trading within certain ranges. An increase in crude oil to $50 per barrel can actually be quite an important psychological shift and be indicative of a more significant move to come. Bankruptcies in the sector have been bringing down production in the US, this is seen as one of the key elements to the supply glut being reversed."
He predicted that global oil stocks could begin falling by the end of the second quarter due to the disruptions in Canada and Nigeria. "Cheaper petrol is also expected to drive demand. The US government estimates fuel demand for cars will surpass a previous record set in 2007 this year. But where exactly the market goes from here is anyone's guess, so investors should be prepared for either eventuality. The much-anticipated rebalancing of the market may still take little more time."
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