Crude Oil Prices rebounded significantly in the second quarter of this year despite a number of threats. Oil prices have had their most positive quarter since 2009, supported by disruptions, outages, political crises and a higher cost of production.
Political instability in Nigeria has sent Africa’s largest producers output down to the lowest levels in 22 years.
In addition, falling Chinese production and the liquidity crisis in Venezuela have also contributed to the decline in crude supplies, providing strength to oil prices. Wildfires in Canada decreased oil supplies by almost 3.5 million barrels a day and is also a key driver behind the record rally in the crude.
Above all, North America, the key player in the crude oil market, is also experiencing problems with sustaining its production potential, thanks to a higher cost of production compared to prices. US production was slashed by almost 8.9% in the last twelve months amid a higher breakeven point.
As a result, after falling to decade low levels in February, crude oil prices have surged over 80% since, despite the failure of the Doha meeting and Britain’s exit from the European Union. In the second quarter of 2016, Brent oil prices surged by almost 25%, while US crude increased 26%, or $9.99 per barrel.
The question here is: what’s next? Do crude oil prices have the potential to sustain their momentum? Crude oil prices are always unpredictable; however looking at future fundamentals might help determine future performance.
Some analysts believe crude oil prices are likely to stand in the range of $60 a barrel by the end of this year, while others are predicting crude oil to hover within the range of $40 to $50 a barrel. Crude oil prices are directly correlated with the level of supplies. In the last three months, crude oil prices surged only due to disruptions and outages, which has little long-term impact on the fundamentals.
With the growth in prices and significant cost cutting, several US producers have indicated they are again working on enhancing their production levels. Recent growth in the US rig count is also indicating this trend. Rising production in Iraq, Iran and Saudi Arabia is another threat for crude oil prices. Taking into account all of these factors, crude oil prices are unlikely to see a similar result in third quarter as they have had in the second.