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04 Dec

Oil to move back to $US75 a barrel

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Oil’s spectacular fall seems to have lost momentum in recent months and now questions are being asked about where the price is heading and what is sustainable.

Over the last 12 months, Brent crude has slumped 44.3 per cent to $US57.87 a barrel, while West Texas Intermediate has dropped 44.5 per cent to $US51.64 a barrel.

However, during 2015, Brent has slipped just 3.9 per cent and WTI has fallen 6 per cent.

Some of the biggest factors behind the fall in the price of oil has been increased production in the United States, as well as a refusal from OPEC (Organisation of Petroleum Exporting Countries) to curb their own production.

But a collapse in the US oil-rig count, which is seen as a reliable guide to the intensity of exploration efforts and future supply, has market pundits thinking in the medium term oil will recover to about $US75 a barrel to $SU80 a barrel.

The US Baker Oil Rig Count has slumped about 50 per cent since its peak in October, but this is not been matched by any improvement in oil price.

“How long does it take until that supply response happens, in terms of declining production? We see that as about a six-month lag from a drop in rig count,” Wingate chief investment officer Chad Padowitz said.

“We see with demand starting to increase in the next two to three months and some supply coming off the table, towards the end of the year is where we see the oil market closer to balance.”

Barring geopolitical events which can impact the oil price, Mr Padowitz said he oil should start normalising on the road to about the $US75 a barrel level in six months.

“Oil is very capital intensive to maintain, let alone increase production. At current prices, it’s not a sustainable plan that generates enough cash flow to maintain production,” Mr Padowitz said.

ANZ head of commodity research Mark Pervan said the drop in oil-rig count has not been matched with a fall in output.

“In fact, US tight oil, or shale oil, production continues to rise, swelling domestic crude oil inventories to the highest levels since 1982, when data collection first began,” Mr Pervan said.

A surge in wells drilled and a backlog of wells to be completed since 2012 will keep supply up in the near term, Mr Pervan said.

“We don’t expect US shale oil output to tighten until the second half of 2015 from lower rig counts in the past six months.”

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