These Factors Could Push Oil Prices Higher

Oil prices rose slightly last week on a variety of news, the most important being word that U.S. inventories have declined further, as well as stronger data on manufacturing in China and military gains by the Islamic militant group ISIS in Iraq.

Perhaps the most important reason that crude oil may trade higher is that in the United States oil inventories fell by 2.67 million barrels for the third straight week, according to a May 20 report by the U.S. Energy Information Administration. US oil production also declined to under 9.3 million barrels a day, its lowest since early February.

The recent boom in US oil production helped create the global oil glut that has sent prices plummeting over the past year, exacerbated by OPEC’s refusal to cut production in an effort to shore up prices. Instead, at the urging of influential Saudi Arabia, it chose to keep production high in an effort to recapture lost market share.

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The second reason oil prices may move higher is that the HSBC China Manufacturing Purchasing Managers Index rose slightly from 48.9 in April to 49.1 in May, a sign of a strengthening in the country’s industrial production. Such activity needs energy, and China is the world’s largest net importer of oil.

A third reason appears to be the continued fighting in Iraq. ISIS, also known as the Islamic State, finally took the city of Ramadi, west of Baghdad, on Sunday in one of the worst defeats for the Iraqi military since the departure of U.S. forces. Yet despite market fears of the fighting, the conflict in Iraq has not yet limited the country’s ability to export oil.

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In March, the average global price of oil had reached its lowest point since 2009, then began to rise, but seemed to reach a plateau of around $60 per barrel. Oil prices have struggled to move beyond that point, but declining inventories could be a deciding factor. Some energy analysts say American supplies could drop further, propping up prices even more. One is Daniel Ang of Phillip Futures of Singapore. “In the midst of high refinery capacity, the decrease in crude inventories is expected and should continue to drop,” he told The Wall Street Journal.

Others, however, say there is so much oil outside the United States that this mini-rally could be short-lived. That opinion is shared by Commerzbank in Frankfurt. “The reported inventory reduction cannot hide the fact that stocks of crude oil and oil products are higher … than last year’s levels, meaning that shortages should not occur,” it said in a report. “We continue to envisage downside risks for oil prices.”

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The acid test will be OPEC’s meeting on June 5 at its Vienna headquarters. Iran, confident that western sanctions imposed because of its nuclear program will be lifted, wants the cartel to make room for its full return to the oil market. And several of OPEC’s 12 members, including Iran and Venezuela, are urging Saudi Arabia, its most influential member, to agree to production cuts to help restore higher prices.

But the Saudis ignored similar pleas before OPEC’s last meeting in November, when it decided to maintain overall production at 30 million barrels per day, and it’s anyone’s guess whether the June meeting will lead to a different result.

By Andy Tully of Oilprice.com

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