Why Oil Surged 50% In 6 Weeks

March 08, 2016

Still, it's far from assured that oil prices won't see more setbacks as the year progresses. As the chart below shows, in January of last year, prices bottomed out also, but only temporarily. Prices rallied 55%—from a low of $45 to nearly $70—before resuming their decline to new lows in the fall.

Brent Crude Oil Price

The bullish outlook hinges on U.S. production continuing lower and OPEC production at least remaining stable. If prices rise high enough, U.S. producers may begin to drill again, creating another glut.

Even shakier is the truce between the various OPEC countries and Russia. Since mid-2014, OPEC increased output by 3 million barrels per day, while Russia increased its output by 300,000 barrels per day.

It's foolish to believe that these oil-producing countries, which are highly suspicious of each other, will adhere to the production freeze agreement for any significant length of time. Iraq in particular―where output rose by nearly 1.5 million barrels per day in the last year and a half―is a country where a lot of new supply is likely to continue to come from.

Iraq Crude Oil Production

Storage Unknown

Then there's the ongoing question of how much storage capacity is left to store all the excess crude around the world. Some analysts still see the potential for a "full storage" scenario that pushes prices significantly lower.

Other analysts downplay the idea, claiming there is ample storage to store the excess oil.

According to the International Energy Agency, global storage capacity is surging this year and has "so far ... remained ample to absorb the extra supply." However, the agency still sees "tank tops coming under pressure," forcing significant volumes of oil to be stored at sea.

Bottom Line

It certainly feels like oil prices have turned the corner and put in at least a short-term low. But there are so many unknown variables that it is difficult to forecast with any sense of conviction where prices will be six months from now.

In any case, it's too early to give the "all clear" sign when it comes to oil, and volatility is sure to remain a feature of the market as long as supply continues to exceed demand by a significant margin.

Contact Sumit Roy at [email protected].

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