Shifts in oil industry boost price

Oil prices have slumped from around $100 a barrel in mid-2014 to under $30 a barrel earlier this year. But the turnaround may finally be here. Brent crude has jumped by around 45% to more than $40 a barrel in just a few weeks. The fundamentals, while hardly suggesting that prices will rocket anytime soon, are looking more encouraging.

There has been a definite shift in oil market psychology, says Julian Lee on Bloomberg.com. Late last year it was clear that ever-rising US oil inventories were the key driver of prices. But in recent weeks it has been a different story. Stockpiles have kept climbing to new record highs, but "the weekly changes are no longer making prices fall". Investors' focus appears to have shifted "from an immediate surfeit of the black stuff to a possible future shortage".

That shortage will be long time coming, but the market glut does look set to abate. There has been talk of a production freeze by key oil market players, including Saudi Arabia and Russia, although discussions are unlikely to start for some time, and Iran has said it won't join a freeze. More importantly, however, "the long-awaited fall in US output seems to be gathering pace", says Lee. Output has fallen in the past six of seven weeks and should keep sliding. The number of active US oil rigs hasfallen to 480 in the week to 11 March, the lowest weekly tally on record.

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According to the International Energy Agency (IEA), a Paris-based forecaster, non-Opec output could decline by 750,000 barrels per day this year, 25% more than it had previously forecast. Meanwhile, the huge output increase predicted when Iranian oil returned to the global market has not materialised. Up to 500,000 additional barrels a day had been pencilled in, but in February the daily increase was just 220,000. Iran had already been exporting "a considerable part of its excess productionvia Iraq", according to Michael Hulme of Carmignac.

Global demand growth should add 1.2% to overall oil demand in 2016. Global population growth means that 80 million more people per year consume it. With supply set to shrink by more than 0.7% of global annual output, the glut should gradually subside. It will be some time before the market comes back into balance, however. The IEA says it isn't sure "when in 2017" this will occur. But with the fundamentals improving, "for prices, there may be light at the end of what has been a long, dark tunnel".