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Oil prices this year have been replicating a pattern from last year, which ultimately ended in a price collapse in 2016, but an analyst of Citigroup says investors should not expect a full price collapse in late 2016 or early 2017.
Commodities represented the top-performing category of assets in investor portfolios during the first half of 2016—a pattern that the goods also exhibited in the first half of last year. Crude oil futures have also been stabilizing at the half point, similar to last year.
Citigroup’s commodities analyst Ed Morse told CNBC that instead of crude oil prices plummeting in the coming winter like they did last year, they will stabilize due to lower global supplies.
"Just the supply-demand balances across commodities is significantly tighter," Morse said. "We are drawing inventories maybe a bit slower than people had thought, but there's not a lot of new incremental supply to come into the market."
Iraq’s production growth has accounted for 75 percent of total output growth within the Organization of Petroleum Exporting Countries (OPEC) last year and Iran’s barrel rate has increased by around 800,000 barrels per day over the past year, Morse said. As a result, oil supply may not be able to grow further at this point.
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Capital spending cuts have left other major oil countries with limited exploration and development budgets. In total, more than $1 trillion in industry funding planned for the years between 2015 and 2020 has been slashed, according to analytics firm Wood Mackenzie.
The United States has been a source of many of the cited cuts. Output in the North American country fell to 8.9 million barrels per day in April from a 45-year high of almost 9.7 million bpd during the same month in 2015.
"Production is going down. It's falling rapidly in the U.S., China, Colombia, Mexico, Brazil, and that's what brings markets to balance," Morse said.
Other industry analysts think that an increased supply of refined fuel supplies could force refineries to take in less crude until prices for gasoline and distillate inventories become reduced.
By Zainab Calcuttawala for Oilprice.com
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Zainab Calcuttawala is an American journalist based in Morocco. She completed her undergraduate coursework at the University of Texas at Austin (Hook’em) and reports on…