Brent crude oil broke $40 per barrel for the first time in 2016

Both U.S. and international crude benchmarks are up over 5% today as rumors of a potential OPEC price floor give new hope of a “fair price for producers and consumers” – a phrase once favored by OPEC. WTI is up nearly $2 at $37.84 per barrel today, while Brent crude broke the $40 mark for the first time since December 9, 2015, making its current price of $40.76 the first time this year the international benchmark has been above $40 per barrel.

Gary Ross, the founder, executive chairman and chief oil prognosticator for consultancy PIRA, told Reuters in an interview that prices should recover to $50 per barrel by the end of the year.

“[OPEC] want[s] $50 oil, this is going to become the new anchor for global oil prices,” said Ross. “While it may not be an official target price, you’ll hear them saying it. They’re trying to give the market an anchor.”

Limits to Saudi’s generosity

The OPEC policy of producing near full capacity has largely been driven by the group’s largest producer, Saudi Arabia. The kingdom recently took part in talks to freeze production with Russia, a plan that is gaining traction and more countries.

Most recently, Nigeria’s oil minister said the Saudis were taking the lead on expanding the freeze, with the minister seeing oil in the $45-$50 range.

“I’m hoping a consensus can be built and that parties can begin to work together across the board, not just OPEC members, but also non-OPEC members, which is what the Gulf States and most of us have pushed for,” Nigerian Oil Minister Emmanuel Ibe Kachikwu said. With that, “you’ll begin to see movement upwards in those prices.”

There may be an upward limit to how far the Saudis are interested in seeing prices recover, however, said Bloomberg First Word oil strategist Julian Lee. Most OPEC producers are already producing at full speed. The exceptions, Iran and Iraq, have both said that they will not join the freeze, meaning more production could flow out of both, adding to the glut.

“So the Saudis will meet with other producers to talk about a production freeze that will not take any oil off the market, because nobody was planning to raise output anyway,” said Lee. “Make no mistake, Saudi Arabia’s oil strategy is based on self-interest… The $8 a barrel rise in crude prices since just before the output freeze was first discussed is worth about $2 billion per month to Saudi Arabia.”

Keeping prices in a range above recent lows, but far from the $100+ per barrel prices that sent shale production skyrocketing could serve the dual purpose of keeping some U.S. production uneconomical while still increasing revenues back to OPEC.

Many U.S. producers, especially those in the Marcellus and Permian, are able to maintain economical production above $40 per barrel though. Including the cost of social programs funded by oil revenues, Saudi Arabia requires a much higher oil prices to break even, although the kingdom has been able to tap its sizable sovereign wealth fund to bridge its fiscal gaps.

ECI Saudi Oil Economics

The market remains oversupplied

Despite the tremendous rally in crude oil prices today, the global market still remains oversupplied with crude oil.

“The past days’ oil price rally was from our perspective less related to a shift in fundamentals but a recovery of sentiment,” said Norbert Ruecker, head of commodities research at Julius Baer.

“We still believe that oil prices experience a short-term bounce but no long-term recovery” due to increased production from Iran and resilient U.S. output, he added in a note to clients.

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