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Oil Hits $50, But Can It Maintain Its Gains?

Oil Rig Dusk

For the first time in over six months oil prices rose to $50 per barrel. Brent crude moved up to $50.19 during morning trading on May 26, the first time that it has hit that point since last November.

The gains add further momentum to a streak that has seen Brent and WTI gain more than 80 percent in value since touching lows in early February at $27 per barrel. For the past few weeks, oil prices bounced around a ceiling at $47 to $49 per barrel, sputtering and struggling to break through that key threshold.

But major supply outages in Canada from the wildfires around oil sands sites in Alberta knocked more than 1 million barrels per day of oil production offline for several weeks. Militant attacks on pipelines in Nigeria has disrupted an additional 800,000 barrels per day. U.S. oil production is down about 500,000 barrels per day since the start of the year, and outages from several Latin American oil producers have also contracted the supply overhang. Related: Would Regulated Oil Prices, Argentine-Style, Help U.S. Shale?

Meanwhile, demand continues to grow at a solid 1.2 mb/d annual pace, and the summer driving season could see demand accelerate.

The shorter-term spark that helped push Brent crude over $50 was Wednesday’s data from the EIA, which showed a strong drawdown in oil inventories. Stocks fell 4.2 million barrels after posting nearly uninterrupted increases since the middle of last year. Although it is too early to know whether or not drawdowns will continue, the decline in inventories fueled bullish sentiment for oil traders. Related: OPEC Head Calls for $65 Oil

The big question is whether or not U.S. shale flips back online now that oil prices have rebounded to $50 per barrel. The plummeted rig count paused last year when oil prices rose to $50 and then $60 per barrel, only to trigger another sell off. With drillers much more financially damaged and still smarting after another year of low prices, many will likely be more cautious before returning to the shale patch. If U.S. production continues to decline as expected, and the rig count stays low, oil prices could see further gains in the months ahead.

“Now we have $50 that is the reference point,” Bjarne Schieldrop, chief commodities analyst at SEB Markets, told the WSJ in an interview. “So when it dips below 50 that will be seen as a buying opportunity.”

By Charles Kennedy of Oilprice.com

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  • John Scior on May 26 2016 said:
    Fed rate hike in June means dollar value goes up and puts downward pressure on price of oil. Also temporary supply interruptions seem to be clearing up also bringing oil price down. Although summer driving season is upon us, I see a disconnect between current prices and market forces of supply and demand. A correction of 15% seems in line with the mid-June to early July timeframe. ( barring any major disruptions ) Factors to support this are improving Libya output, fires being squelched in Alberta, Iraq and Iran production improving, an increase in Fed rates puts pressure on other central banks to also raise their rates- thus putting a damper on the world economy and world demand.
  • John Scior on July 07 2016 said:
    Another 3 bucks off wti and I would say my crystal ball is pretty clear. Despite no fed action and the Brexit. Today WTI closed at 45.19 or approx 10% off the 50 mark

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