There seems to have been a rapid shift in sentiment in the oil market towards a belief that supply-demand might be moving into balance faster than expected.
Crude oil prices hit a two week high last week and the differential in New York compared with London’s Brent crude eased.
New York oil traded around $US46 a barrel overnight.
There’s now a feeling that the output cuts promised by OPEC, are happening and sticking for the moment.
OPEC will cut supplies by 5.4% this month to 26.15 million barrels a day, according to early figures from consultant group PetroLogistics Ltd.
And other analysts are more confidently claiming that a lot of the oil surplus will disappear in the next few months because of the OPEC cuts.
The price contango between the current month in the futures market and the out months is still high, indicating that some buyers believe prices later this year will be higher as the output cuts work their way through the system.
That of course assumes that the global economy doesn’t worsen any further and demand from China stabilises.
Starting this month, OPEC members with production targets, all except Iraq, have a combined quota of 24.845 million barrels a day.
According to PetroLogistics, the cuts have forced output below the quota limit, a sign of the determination some in the organisation have towards enforcing the production chop.
It is generally accepted to be Saudi Arabia which has been reported as making it clear that it will push its output even lower to make the cutbacks work in the marketplace.
The country is expected to cut output to below 8 million barrels of oil a day (b/d) next month, down from about 9.7 million b/d in the northern summer.
Iran, Venezuela, Nigeria and Ecuador were reported to be cutting output, instead of cheating by pushing more oil into the market than allowed.
How long this newly found discipline lasts is another thing as the whims of the rulers of these countries and their need for cash will make them unstable supporters of the cuts if the global economy slows even further, as it could very well do.
Mexico said that its 2008 output was the lowest in 13 years as it fell to around 2.3 million b/d.
That 9% fall was the biggest in 50 years and Mexico, like Nigeria, Iran and Venezuela, are paying the price for under investment, poor maintenance and aging fields (and keeping out foreign companies with the know-how to boost output).
Russia, the biggest non-OPEC country, is in the same boat and will be under growing pressure this year to maximise oil income to offset a sharp slowdown in the domestic economy and rising instability in the financial sector.
Oil traders last week reported that the oversupply of crude (which had seen major oil companies chartering tankers to store crude for delivery later this year to try and take advantage of the contango effect) was easing.
In fact the Financial Times reported late last week that oil tanker loads, which a month ago were proving unsaleable because of the glut in the physical oil market, were selling relatively quickly as refiners look for supplies to replace the oil they are no longer being offered by OPEC countries such as Saudi Arabia, Iran and even Venezuela.
The paper said some refineries in Asia were looking for oil to replace shortfalls from OPEC suppliers.
We will get two timely reminders of the downside from the oil price crunch when US giants, Chevron and Exxon Mobil report 4th quarter and 2008 figures this week.
For both it will be a year of two halves: boom in the six months to June, slump in the December half.
We saw that 4th quarter bust impact the giant Schlumberger oil services group which Friday reported that it would cut its staff by 5,000 worldwide after producing a 17% drop in earnings.
The company made clear it saw even tougher times ahead this year as demand for oil, oil services and supply are cut by the economic downturn.
Andrew Gould, chairman and chief executive of Schlumberger, said that oil companies had been curtailing their business faster as oil prices collapsed in the past months quicker than during the last such contraction in 1998.
The company employs about 87,000 people and has already said it would cut 1,000 jobs in North America. Mr Gould said that he could not rule out more job cuts in the first half of this year.
Mr Gould also warned that the recent sharp decline in the price of oil was making some fields uneconomic.
Media reports saw lots of so-called ‘stripper wells’ in the US (which produce a few barrels a day) are being closed down because they are not economic at current prices. That will add to the growing constraints on supply talked about above in this story.
Schlumberger said net profit, including charges and credits, was $US1.1 billion, in the last quarter of 2008, compared to $US1.3 billion in the last quarter of 2008.
The company’s profit margin plunged from 40% to just 15% in the quarter from the September quarter.
Figures from the US Department of Energy last week showed that US fuel demand averaged 19.4 million barrels a day in the four weeks ended January 16, down 4.7% from the same period of 2008.
When the world’s biggest user of oil and gas is slowing, everyone is hurt.
