After two-straight years of plunging prices, 2016 is shaping up to be a year of recovery for oil.
Prices for U.S. benchmark West Texas Intermediate (WTI) oil futures contracts were last trading around $45/barrel, up 21% year-to-date. That's a much better showing than the 46% drop in 2014 or the 30% decline in 2015.
From a price perspective, it's safe to say that the worst of the oil bust has passed now that prices have nearly doubled off their lows of $26 from earlier this year.
From a fundamental perspective, things seem to be moving in a bullish direction as well. As of this writing, data from the Energy Information Administration shows that U.S. crude oil production is down to less than 8.5 million barrels per day, a drop of 1.1 million, or 11.5%, from the highs of last year.
U.S. Crude Oil Production (thousand barrels per day)
At the same time, global oil demand is up 1.4 million barrels per day this year to a record-high 96.3 million, according to the International Energy Agency (IEA).
The narrowing of the gap between supply and demand may lead to a "hefty draw" from inventories in Q3, according to the IEA. That would be the first time demand exceeded supply on a quarterly basis in almost three years.
Not Smooth Sailing
To be sure, despite the improving fundamentals, there are plenty of obstacles for the oil market ahead. Inventories remain exceedingly high and must be drawn down before the market truly rebalances.
Meanwhile, some U.S. oil producers have been accelerating their drilling activity as prices have rebounded, hinting that output may stabilize or even rise at some point down the road.
On the other hand, recent talks between OPEC and Russia to freeze their production levels have lent a bullish hand to prices. The push and pull of these various factors will likely keep oil traders guessing for the foreseeable future.
