Cautious optimism over rising oil prices

16 June 2016

Recovery towards $50 a barrel may not be evidence of a sustained supply-demand balance emerging

The Brent crude price rose above $50 a barrel for the first time in 2016 at the end of May, giving some hope of a recovery in the beleaguered global oil sector.

Analysts, which have largely boosted forecasts for the year, are however cautious on predicting a return to a sustained $50-plus prices.

The US-based Energy Information Administration (EIA), in its latest forecast released on 6 June, edged its outlook for Brent up by $3 to $43 a barrel for 2016 and by $1 to $52 a barrel for next year.

Opec and the International Energy Agency (IEA) have both forecast that the market would return to a supply-demand balance in the second half of 2016 following a two-year period of low prices caused by significant global oversupply.

Rather than any significant increase in demand, the surplus production has largely been eliminated by unforeseen supply disruptions in Nigeria and Canada, as well as continued outages in Libya, which the EIA estimates together have wiped off an enormous 3.6 million barrels a day from global supply.

With global inventories still high, it is too soon to predict whether upswing in prices from the end of May is sustainable or merely a blip caused by extraordinary circumstances.

Whatever the factor behind the modest recovery in prices, governments in the Middle East have reason to be cautiously optimistic about higher revenues in 2016 as policies come into place to tackle the potential impact of a sustained period of lower prices.

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