Has Oil Bottomed Out?

Oil prices have taken a dramatic turnaround in the past ten days. West Texas Intermediate has rebounded from a low of $26.55 to trade at over $38 a barrel. Most analysts are now calling a bottom to the route that started in 2014 and is now the longest bear market in oil’s history.

Many factors have increased crude prices over the past week. Iraq has experienced a pipeline shut down. This has taken away up to 600,000 barrels a day of production. Supply and demand is currently quite tight in the oil market as the Saudi’s are pumping much of their strategic reserve that would normally offer a buffer for shut downs.

In addition, the market is reacting positively to ongoing discussions between Russia and OPEC members. If these producers freeze production at January levels it will allow the market to clear out faster as high costs producers shut down.

As yet none of the key players in the oil market are talking about production cuts however the fact that they are talking at all is sufficient for the market to begin rising.

Recent production figures from Iran have also been smaller than expected, the key driver to move prices down to the $20’s was the threat of vast amounts of Iranian crude hitting an already oversupplied market. However, it now seems that it will take the Iranian’s longer to get back to the market that was initially thought.

It is our expectation that prices will top out circa $40 a barrel on WTI before dropping back down. However we expect to see prices turn around again at $34 a barrel then head back up. Our expectation is still for oil to be trading between $50 and $60 a barrel in the next 12 months and move back up to around $80 a barrel over the next three years.

The International Energy Agency has reported that due to the damage done over the past two years to the oil and gas sector and the lack of investment, oil prices in 2020 may well exceed $120 a barrel, especially as older, higher cost basins such as Alaska and the North Sea begin to dry up and very little, if any, new high cost oil projects are being launched.

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