Key points

• Oil prices rebounded sharply in April and May, benefiting from a confluence of factors: a stall in the USD rally, signs of slowing inventory build-up in the US, as well as unabated geopolitical volatility in the Middle East marked by Yemen civil unrests. In May, Brent and West Texas Intermediate (WTI) indices both rose by 9%, while Tapis charted an increase of 8% to average at US$65, US$59 and US$67 a barrel.

• In the first week of June, oil prices have lost some momentum ahead of the OPEC meeting held on the 5th June. In line with market expectations, OPEC decided to keep its output quota of 30 million barrels a day unchanged during the meeting. This, combined with a weak Chinese crude import data for May, weighed down on oil prices at the start of this week.

• US weekly field production of crude started to slow in late March, with the 60% fall in rig count since December finally showing some effects on the overall crude production. However, a remarkable rebound in oil prices in April and May appeared to encourage a pick-up in crude production towards the second half of May, with the weekly production rates for the two weeks spiking to around 9.6 million barrels a day, the highest weekly rate since 1970. This suggests that there was plenty of latent production capacity in the US still which can respond very quickly to price changes.

• Evidence from secondary sources suggests that US oil producers are working through a large backlog of drilled but uncompleted wells, which have a significantly lower cost hurdle to achieve production, and an estimated number of these wells from Bloomberg Intelligence points to a figure as large as 4,500 in Q1. This estimate, if credible, constitutes some upside risks to our expectations that US oil supply will come off notably more quickly in H2 of 2015. Combined with sustained strength in OPEC production, the current glut situation is expected to persist for longer than previously expected, thus limiting the upward mobility in prices for the rest of 2015 and 2016. As such, we expect oil prices to stay around current levels in the coming months before embarking on a more sustainable, albeit still gradual, upward trajectory in 2016.

For further analysis download the full report.

Oil Market Update – June 2015 (PDF, 433KB)