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British analysts explain reasons for recovery of oil prices

Wednesday, April 22
World oil prices rebounded in the last few weeks, however, some major headwinds both on the supply and demand side – as well as the broader financial backdrop – mean that a strong recovery is unlikely, Julian Jessop and Tom Pugh, commodities economists at British economic research and consulting company Capital Economics believe.

The price of a barrel of Brent has recovered to around $63, up $17 from its January low of $46. The cost of the traditional US benchmark, WTI, has risen to $56, up $13 from its March low of $43, economists mentioned in a report, obtained by Trend.

However, the report doesn’t exclude several bouts of renewed price weakness later this year.

Analysts believe that the most important reason for the recovery is the growing evidence that US oil production is leveling out in response to the previous sharp falls in prices.

“It has taken a while for the collapse in the number of active drilling rigs to result in lower output (due in part to the increased productivity of individual wells), but this is now starting to feed through into the hard data,” said the report said.

The financial backdrop has also been more favourable, analysts believe.

“The dollar has been relatively stable since early March, while the recovery in oil prices has probably been accelerated by a squeeze on speculative short positions,” they said.

The economists assume that there may be scope for oil prices to be lifted further in the near term both by falling US oil output and crude stock data, and by better news on the demand side from the economies of the US, euro-zone and China.

But there are still substantial downside risks, they added.

“For a start, US supply could quickly rebound in response to the recent recovery in prices. An early sign of this would be a renewed pick up in the number of active rigs, data which we will continue to monitor closely. In the meantime, the supply from OPEC has continued to climb, even before the potential boost from the easing of Western sanctions on Iran,” according to the report.

Overall, Capital Economics’ economists expect oil prices grinding only a little higher, towards $70 per barrel by end-2017.

Oil prices fell from more than $110 a barrel in June to near $45 a barrel in January. They have since recovered to around $65 a barrel. (