Trading remains stuck in mid-$50s despite output falling 890,000 barrels a day

From The Week UK

The oil price has failed to break out of its mid-$50s range, despite data from the powerful Opec cartel showing its members are sticking to a deal to cut production.

Figures published yesterday revealed the 14-nation group’s output declined by 890,000 barrels a day to 32.14 million barrels a day in January, says MarketWatch.

Analysts say that means the organisation is already 90 per cent compliant with the cuts it agreed at the end of last November and that the headline figure is actually below the targeted total of 32.5 million barrels a day.

All of which should increase confidence that the supply overhang in the market will begin to be eroded: Opec itself predicts the market will be in supply deficit by the second half of this year.

But the oil price at first dipped slightly yesterday and while it has moved higher today, it remains rooted in its narrow recent range.

Brent crude, the international oil price benchmark, rose 1.2 per cent this morning to $56.24 a barrel, while its US counterpart, West Texas Intermediate, increased by the same margin to $53.58 a barrel.

Oil has doubled in value compared to its nadir this time last year and is up by around a third since the final agreeing of the Opec deal, which also includes cuts by non-Opec members such as Russia.

However, forecasts that it would push on to $60 or even $70 and beyond in quick succession have so far failed to come true.

Reuters says the oil price might be capped by investor doubts over whether the producers will stick to their promises long enough to see a significant run-down of reserve, which have built up in the past two years.

“Lessons from the past have made the market deeply suspicious,” Hans van Cleef, senior energy economist at ABN Amro, said.

MarketWatch also highlights data showing US shale oil production increasing since oil prices rose above $50 earlier this year.

Data from the US energy department revealed output hit a ten-month high of close to nine million barrels a day earlier this month, while a report later today is expected to show crude reserves rose again last week, by 3.2 million barrels.

BP needs oil to rise to $60 to break even

BP says it needs oil prices to rise substantially this year in order to balance its capital spending and cash flow, according to The Times.

Having previously said it would break even in cash terms at an oil price of between $50 and $55 – a level at which BP has been trading solidly since the end of the year – the company now says it needs oil to fetch $60 a barrel.

BP made the admission in its fourth-quarter results, which reveal that last year, when the oil price averaged $44 a barrel, the oil giant made a total loss of around $1bn (£800m).

This was in part due to compensation costs relating to the Deepwater Horizon explosion and subsequent oil spill in the Gulf of Mexico – BP’s provision was upped by $800 (£640) to $62.6bn (£50bn) at the end of last year.

For the final three months of the year only, the company made an underlying operational profit of $400m (£319m), “more than double the same period in 2015 but below analysts’ forecasts of $560m (£447m).

As a result, BP became the latest oil major to report underwhelming figures, disappointing traders hoping to find evidence that the industry had reached an inflection point after Shell last week fell $1bn (£800m) short of analyst expectations.

The news – and the target of $60 for the oil price – came on the day that the international oil price, Brent crude, fell back below $55 a barrel.

Benchmark prices have been stubbornly rooted around the mid-$50s since the start of the year, amid hopes that a supply cut by Opec and others would rebalance the market and concern over renascent US shale production.

This could keep the oil price below the $60 threshold for some time unless there is statistical supply evidence that proves the market has moved sustainably into deficit against demand.

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