Dipping oil prices have become the norm in the past year, with surplus inventory and increased competition worsening the glut. But things finally seem like they're about to change.
Crude oil traded for a value above $50 for the first time since May 25th, right after it finally had an almost 9% rise last week: a sight that has not been seen in nearly an year.
The sudden change can most likely be attributed to two main reasons, both pertaining to the supply side of the oil market. The first is that when companies and producers finally started to see that oil prices weren't going to increase anytime soon, they focused their efforts on cutting costs instead. This was achieved primarily by adopting more efficient technologies that improved extraction and drilling techniques to lower operating costs and increase cash flow.
A host of oil giants have reported more positive results this quarter after embracing some of these newer technologies and seeing fast results. For instance, "BP (NYSE: BP) was the latest to publish its earnings, reporting a $144 million profit for the 2nd quarter compared with a $1.4 billion loss in the period a year earlier."
This is a classic case of adaptation to the changing needs of the market: if you can't change the market, change yourself. Oil firms across the world have finally accepted that traditional price altering methods such as cutting supply, investment and jobs will no longer fly in a market that can simply turn to cheaper and more efficient alternatives. The monopoly over oil that all-powerful institutions like OPEC used to have is finally being broken up and distributed as more firms enter the market.
"Nobody is standing around, waiting for prices to go up substantially," said Mr. Yergin, vice chairman of the research firm IHS Markit. "The industry is in the middle of re-engineering its processes and its technologies to be a $50 industry, not a $100 industry.
The second reason is more political than economic. Recent trouble in Venezuela, a major oil hub, has been cutting off oil production from the region. Venezuela has the most oil reserves in the world and any instability there that interferes with the mining of oil could cut supply short and also relieve downward pressure on oil prices.
Two senior government officials told CNN on Sunday that new sanctions on Venezuela could be announced as early as Monday. One option is a possible ban on sales of U.S. crude and refined products, though an embargo of shipments of Venezuelan oil to the U.S. is off the table for now, a source said.
In addition to this, talks of extending the OPEC-sanctioned oil production cut to even beyond March 2018 as well as Saudi Arabia indicating that it will reduce oil exports this month. Moreover, on the demand side, extremely strong demand has helped to deplete high levels of inventory in the U.S. as part of the summer driving season.
That being said, "Halliburton (HAL) executive chairman Dave Lesar said during an analyst conference call last week oil 'customers are tapping the brakes' and closely-watched rig counts 'showing signs of plateauing.'" It's all a balancing act and producers must remain cautious.