With oil prices rising sharply over the past couple of weeks, many are wondering if the price has bottomed out. In early February the price of Brent Crude Oil hit $28 per barrel, however talks of an output freeze between the Saudis and Russia has fuelled a sharp recovery, with prices opening on Monday the 14th of March at just over $40 per barrel.
There is a slight problem with a recovery based on the deal between the Saudis and Russia however, as the levels they are planning on freezing at were already at record highs. The deal also has a number of clauses which can allow Saudi Arabia to leave at any point they choose.
The fear for Saudi Arabia is if they were to produce less oil, the hole in the market would be quickly filled by Iran, who have only recently had international sanctions lifted, and Iraq who require the finances to fight Islamic State.
Will prices return to a downward trend?
Oil producing nations would like to think not, as they have all felt the pinch in their pockets over the last year. Countries such as Russia, have had to cut public spending tremendously to keep their country’s balance sheet out of the red. However, the recent recovery is based on a deal which some believe is a short term ploy to boost oil revenues.
Oil storage around the world is currently still at record levels, with the US currently at 88% capacity. Whenever that has gone above 80% in the past the price of oil has sharply fell over the weeks that followed.
Some also point to the fact that the number of oil wells being drilled has fell dramatically due to low prices, which is fuelling a recovery in price. The number of oil wells being drilled has fell dramatically in the United States and Canada, however, in the Middle East where most of the over supply is coming from, the number of wells being drilled has hardly fell at all.
All in all, although the price has recovered recently, we could be seeing a ‘dead cat bounce’. This is where the price of something rises due to speculation, such a an output freeze, and then falls again due to the real facts on the market, which is that it is still tremendously over supplied.