Oil Prices Rise on Russian Intervention in Syria

Oil futures approached $50 per barrel today as traders shifted their focus from high supplies to declining oil production in the U.S. and Russia’s military operations in Syria, which is likely to disrupt the flow of oil in the region. West Texas Intermediate (WTI) crude oil futures for the month of November jumped from $47.81 to $48.60 a barrel, an increase of 170 basis points, on the New York Mercantile Exchange (NYMEX).

The Price of WTI Crude oil has increased this week as plunging oil prices over the last year prompted energy companies to cut their capital expenditure leading to a decline in rig counts and a decline in production in the U.S. Last week, Baker Hughes (BHI) reported a sharp decline in the rig count, leading to increase in oil price earlier this week. Ritterbusch and Associates, an energy advisory firm, said, “This week’s rig-count data, due Friday, will be closely watched.” He added, “Any additional rig decline tomorrow would be expected to spur further price support.”

Oil prices have been further boosted by growing global demand. Abdalla Salem El-Badri, secretary general of OPEC, said to the IMF, “World oil demand is estimated to increase by 1.5 million barrels per day in 2015, higher than the initial projection.” He added, “In 2016, improvement in global economic activities is anticipated to support world oil demand to grow by 1.3 million barrels per day."

However, many analysts believe that the increase in oil prices will remain limited and might fall over the short term as a result of oversupply in global crude oil. At the same time, some analysts even believe that once U.S. crude oil reaches $50 a barrel, a level it has not reached since July, it will have the momentum necessary for a further increase. Tariq Zahir, a member of Tyche Capital Advisers, said, “We have technically broken out of the range we have been in the last month or so.”

No Post Hoc in Oil Prices

On October 7, oil prices fell after U.S inventory data indicated a more than expected rise in oil supplies. But market participants are more interested in future production than current supplies. One energy-advisory firm said, “However, the current glut of crude is mostly priced into the market, and traders are more focused on indicators of future production.”

Russia’s increasing military intervention in Syria has increased uncertainty in the Middle East, one of the biggest oil producing regions in the world. Tim Evans, chief market strategist at Long Leaf Trading Group, said, “Very cautious statements by the NATO chief also has the market concerned that Russia will not be restrained in their activities, leaving a stronger likelihood that this military campaign could spread regionally.”

The Bottom Line

The recent increase in the oil prices have perplexed many analysts, with some saying that the increase was driven by fall in the U.S. Production while other saying that it was a result technical momentum. On the other hand, there are some such as Goldman Sachs who continue to hold bearish outlook on oil prices. The bank has mentioned in a note their clients that the recent rise in oil prices is not supported by supply-and-demand data. The bank wrote, “We expect this rally to reverse and reiterate our forecast for lower prices for longer.”