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Monday, June 20, 2016

Oil prices may begin to decline again

Gulf oil platform
As the number of U.S. oil drilling rigs is rising and Canadian production from the oil sands begins to come on line again after recent fires, the price of oil is beginning to fall. Oil prices were down 3 percent on Friday.​ It appears that weekend profit-taking in Brent and US crude futures also helped drive prices down. Brent's front-month price was down $1.41 at $50.54 a barrel. West Texas Intermediate (WTI) fell $1.49 to $49.07. This is the largest drop since early April.

For the entire week, however, Brent rose 2 percent and WTI about one. Crude futures are also almost 90 percent higher than the 13-year lows during the winter as supply disruptions in Nigeria, Canada, Libya, and Venezuela drove prices up. Prices had earlier gone down to below $30 dollars a barrel.

In the US, drillers added three oil rigs in the week up to June 10. In the previous week, nine rigs had been added. Tariq Zahir a trader in WTI futures said"This looks like the beginning of a trend that will translate to the slowing down of U.S. crude production declines. I'm adding to my short positions in spreads." Scott Shelton, energy broker with ICAP in Durham, North Carolina said that the rise in rig counts so far will not significantly change the supply of crude.

The price of oil has almost doubled from the lows reached in the middle of January this year. Brent rose above $50 a barrel and stayed there. WTI has risen considerably as well. While there have been serious disruptions of supply in Canada and Nigeria and little production in Libya that helped eliminate the oil surplus, Canadian production is already beginning to come back on line. Production in the US has just risen for the first time in three months. In spite of the outages, the IEA still sees global inventories as rising through August. Any improvement in the situation in Nigeria or Libya could see prices fall further.

For the longer term, new discoveries off the coast of Newfoundland may further add to production already coming from the nearby Hibernia field. Statoil, the Norwegian oil company, claims a 19-month drilling program discovered oil at two location in the Bay du Nord area in the large Flemish Pass area. Statoil says that it appears that reserves at the Bay du Nord side were likely at the lower end of the estimated 300 to 600 million barrels. Paul Fulton, president of Statoil Canada said: "The recent drilling program has been critical to Statoil's continued assessment of Bay du Nord and work is underway to evaluate the results related to proceeding with a potential Statoil-operated development in the Flemish Pass Basin".

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