Have oil prices hit bottom?

Oil prices jumped last Tuesday on news of a deal to freeze production between Saudi Arabia and Russia – but not for long.

782-oil-634

Oil prices jumped last Tuesday on news of a deal to freeze production between Saudi Arabia and Russia, but finished the week pretty much where they started it. That's "probably a fair reflection" of the deal's significance, says Malcolm Graham-Wood on MalcysBlog.com. A freeze on production, while "laudable, ain't going to change the market". There is still a glut, which will look even worse next month when refiners do their usual maintenance ahead of the driving season and thus cut back on buying oil in the market.

Even the agreement not to raise output at record highs in both countries depends on other countries signing up, adds the Financial Times. Heavyweight producer Iran, keen to secure market share as sanctions are eased, hasn't exactly rushed to endorse the deal. "Short of a revolution in Riyadh", says Nick Butler in the same paper, it's hard to see prices going above $50 a barrel for three years.

But is the bearishness in the oil market overdone? An immediate price surge may be off the table, but prices could well have hit bottom. They've held above $30 for a month; the glut increasingly looks to be "priced in"; and the Russia-Saudi deal (the first between a member of oil cartel Opec and a non-member for 15 years) shows producers are willing to explore ways of eventually cutting output.

Meanwhile, drilling activity, and hence future output in America, continues to fall. The number of operational oil rigs has fallen to just over 500 from 2,000 a few years ago, says Liam Halligan in The Sunday Telegraph. With the International Energy Agency expecting supply and demand to rebalance by 2017, prices may begin to tick up as investors look forward to the glut disappearing.

And once they do turn the corner, they could rise faster than everyone expects, says the FT'sJohn Dizard. This is due to the structure of the oil futures market. At present oil producers have heavy debt loads or large populations to keep happy, so they have kept pumping oil despite ample supplies. This has fuelled demand for storage and driven up the price of oil futures compared to spot prices, creating a pattern called "contango".

This in turn has prompted speculators to reinforce the trend and price pattern via an oil "cash-and-carry trade": selling short-dated oil and buying long-dated futures. But once investors think the spot price is set to rise, they will unwind their positions, sending futures prices down and spot prices up just as currency carry trades can quickly unwind and move prices. If oil has hit "peak bear", you may be surprised at how fast it snaps back.

Recommended

Hold on to your oil and gas stocks
Energy stocks

Hold on to your oil and gas stocks

Oil and gas stocks have done very well in the last few months. But they’ve got a long way to run yet, says Dominic Frisby.
10 Nov 2022
Get paid to use less electricity with a new National Grid scheme
Personal finance

Get paid to use less electricity with a new National Grid scheme

A new scheme by the National Grid Electricity System Operator has launched giving you £100 for using your appliances during off-peak times following b…
4 Nov 2022
Why there is still life in the energy bull market
Energy

Why there is still life in the energy bull market

A green power initiative on the Galapagos Islands demonstrates how the renewable energy transition will need to be supported by fossil fuels for some …
4 Nov 2022
Natural gas prices drop: is this good news for your energy bills?
Energy

Natural gas prices drop: is this good news for your energy bills?

Natural gas prices have dropped over the past couple of weeks, but this is unlikely to filter through to consumers and businesses until 2024.
25 Oct 2022

Most Popular

Wood-burning stove vs central heating ‒ which is cheapest?
Personal finance

Wood-burning stove vs central heating ‒ which is cheapest?

Demand for wood-burning stoves has surged as households try to reduce their heating costs this winter. But how does a wood burner compare with central…
21 Nov 2022
Fan heater vs oil heater – which is cheaper?
Personal finance

Fan heater vs oil heater – which is cheaper?

Sales of portable heaters have soared, as households look to cut their energy costs. But which is better: a fan heater or an oil heater? We put them t…
21 Nov 2022
Santander launches new bank account – is it any good?
Bank accounts

Santander launches new bank account – is it any good?

Santander’s new accounts gives you up to £20 cashback a month and 4% interest rate on savings.
25 Nov 2022