The relative recovery in oil prices in recent weeks may have pleased the majority of market participants, especially on the side of some oil producers, oil companies and related industries. The average price of the Opec basket of crude oils during January was $44.38 (Dh162.87) a barrel, down by $15.08 a barrel from December.

However, oil prices recovered some ground since to oscillate around the mid $50s, and the Opec basket was $53.81 on February 25, though down from the $56.55 on February 22. The reason for this recovery has been attributed to supply worries, especially with respect to the unrest in Libya which threatened its oil ports and other facilities.

At the same time, oil rig counts in the US are down, which implies lower growth in supplies from tight oil in that country where some economic indicators have shown improvement. The announcement of reduced investment by the majority of oil companies may have played a part in the price recovery.

The International Energy Agency (IEA) in its February Oil Market Report said: “A partial rebound in oil prices suggests market participants are seeing light at the end of the tunnel and growing confident that spending cuts by oil companies will lead to a market recovery”.

But supplies are plentiful and the market may be more worried about longer term consequences. The price decline by close to 50 per cent from its level in June 2014 has not translated into greater demand growth, while supplies from Opec and non-OPEC are still increasing. Stocks are brimming, especially in the industrial countries, and while they were below the five-year average for most of 2014, they are now above that mark by millions of barrels.

The OECD stocks (government and commercial) at the end of 2013 were 4,151 million barrels — sufficient for 91 days of demand cover. They increased to 4,281 million barrels by the end of 2014, sufficient for 94 days. Société Générale forecast the adding of roughly 300 million barrels to global stocks by the end of the first half of this year.

But this cannot go on and if storage space runs out, prices could fall again. Analysts realise now that the impact of precipitous price fall takes some time before they translate into noticeable changes of supply and demand. The fundamentals for 2015 are for a modest growth in demand by 1.17 million barrels a day (mbd) according to Opec and 0.9 mbd according to IEA.

Changes expected

Non-Opec production while more responsive to oil prices are forecast to increase by 0.85 mbd according to Opec and 0.8 mbd according to IEA. Therefore, the call on Opec crude oil is 29.2 and 29.6 mbd for the two organisations respectively, much lower than current production of close to 31 mbd.

Changes are expected to be felt more in the second half of this year when some reduction of US’ tight oil growth is expected.

News that the Nigerian Minister and Opec President Diezani Alison-Madueke may call an emergency meeting for Opec to discuss the fall of oil prices were quietly dashed through opposition from Gulf members. Without accepting the idea of production cut, any Opec meeting prior to the ordinary meeting in June may be counterproductive.

Production cuts have been ruled out since the Saudi minister Ali Al Nuaimi said that there will be none even if prices fell to $20 a barrel. And recently Saudi Arabia and other Gulf producers have increased discounts to Asia to maintain or increase their market share.

The signals in the market are still mixed. While bankers believe that the current price recovery is temporary and prices may decline, some analysts believe that shale and tight oil may have put a floor under prices and also a cap, and therefore prices may stabilise around the current level or rise gradually without reaching $100 a barrel.

The Energy Information Administration (EIA) forecasts Brent crude oil price to average $58 a barrel in 2015, while only a few months ago $100 a barrel was their forecast. The Economist Intelligence Unit expects Brent crude to average $54.4 a barrel this year.

A significant indicator in the market is that EOG Resources Inc, the shale revolution champion in the US, has reduced its 2015 budget by 40 per cent, and said its output will not grow this year contrary to earlier expectations.

In conclusion, we have yet to see where oil prices are heading and if the 50 per cent reduction from June 2014 will produce the desired results for OPEC’s market share or not.

The writer is former head of the Energy Studies Department at the Opec Secretariat in Vienna.