Oil stays above US $40 mark

An employee holding a gas pump to refill a car at a petrol station in central Seoul.
An employee holding a gas pump to refill a car at a petrol station in central Seoul. PHOTO: REUTERS

More producers agree to freeze output but fears of oversupply remain

Oil managed to stay above US$40 a barrel as more producers agreed to an output freeze to support prices and traders started cutting back short positions.

Brent crude was trading at US$40.72 last night after hitting US$40.84 a barrel on Monday, levels last seen in December last year.

The slight decline yesterday came after China's weaker- than-expected trade data and Kuwait's comments that it would agree to curb production only if all major producers, including Iran, took part. Iran had earlier called the proposal "laughable".

Brent crude is now about 46 per cent up on the 12-year low of US$27.88 posted on Jan 20, while United States West Texas Intermediate is around US$37.72 a barrel, up 44 per cent from its 2016 low on Feb 11.

Prices are responding in part to reduced output in the US, where the national rig count dropped last week to its lowest level in more than six years.

OUTPUT FREEZE NOT ENOUGH

We believe that this is too soon for oil prices to recover.

'' MR DANIEL ANG, Phillip Futures investment analyst, noting that the oversupply means a freeze is barely enough

That is a sign that US oil producers are cutting back on output as low prices make high-cost rigs uneconomical.

Globally, the number of oil and gas drilling rigs has fallen by 130 from January to 1,761 last month, the lowest number since 2002.

"Brent is back to a more reasonable level," RHB Research investment analyst Lee Yue Jer said. "There is a recalibration of sentiment away from extreme pessimism to a more neutral view, as fears over China's hard landing, Iranian oil and US output are receding. We should see the physical market start rebalancing."

Russia said last Friday that a meeting between Organisation of Petroleum Exporting Countries (Opec) nations and other producers about freezing output could occur this month.

Latin American producers will meet on Friday to discuss "the issue of oil prices", according to Ecuador's Foreign Ministry.

Whether oil's rebound is sustainable remains to be seen.

The oversupply means a freeze is barely enough, said Phillip Futures investment analyst Daniel Ang, who added: "We believe that this is too soon for oil prices to recover."

DBS Group Research said yesterday it will "hold off on calling a recovery, as the fundamental oversupply situation remains, and the full impact of additional Iranian barrels has yet to be felt".

Goldman Sachs noted yesterday that the price surge in commodities was premature and unsustainable "in the current environment".

Data due today is forecast to show that US stockpiles increased last week to their highest level in more than 80 years while Iran, one of the world's largest producers, is set to increase production later this year after sanctions associated with its nuclear programme were lifted.

A version of this article appeared in the print edition of The Straits Times on March 09, 2016, with the headline 'Oil stays above US $40 mark'. Print Edition | Subscribe