Oil Recovery Slows Down Despite Improvement

The oil industry is showing signs of recovery, however rather than increasing spending and production immediately, companies are opting to play it safe. 

The oil industry is improving

The oil industry has recently shown signs of improvement with the price of oil recently rising to $50 a barrel.

The increase is nearly double what oil prices were back in January.

The increase was short lived, and the price of oil has since fallen to $49.33 a barrel.

Oil companies have not yet responded to the changes in oil prices and have not yet attempted to increase their production or spending.

The price of oil has a history of rising and falling; however, prices have slowly started to increase after initially falling in January 2016.

Why are oil companies playing it safe?

Anglo-Dutch and Shell have announced that they are still going ahead with spending and job cuts regardless of the recent increase in prices.

So why are oil companies still cautious?

Oil companies, such as BP and Exxon, have committed significant sums of money to large gas and oil projects over the last decade, but the recent slump in oil prices have meant that they have had to make drastic budget cuts.

It is understandable that they would be cautious of any signs of improvement.

There have been reports that even a price rise of $60 per barrel would not be enough for oil companies to consider escalating their current activity.

Big US oil companies will first want to assess whether the $50 rise is sufficient for them to start pumping oil from wells already in production before they construct further wells.

Larger companies may not be able to afford to increase their output, but some smaller companies have announced that the rise in price is sufficient for them to up their oil production.

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What has caused the improvements?

Oil prices slumped in the first part of 2016; however, since April prices have started to shoot up.

This drop and the rise of the prices led to a huge surge in demand for oil, and the decline in oil production.

The reasons for this surge in demand are the drop in US oil supplies and production.

US oil supplies fell by 4.2 million barrels on May 20th, 2016 when compared to the week before.

This decrease was not a surprise, however, it was greater than expected.

This caused investors to react and prices to rise.

US oil production has continued to decline, and US companies are continuing to cut their production.

Global demand has increased to 1.4 million BPD in the first quarter of 2016; current market stands at close to 3 million barrels per day.

Asian markets are mainly responsible for this demand in oil, particularly the Chinese and Indian markets.

Does this mean the oil crisis is over?

Oil companies may be wary of acting now.

However, they remain optimistic about the future.

The future markets are currently predicting that the $50 oil price rise will continue into 2017.

If this stands then this will allow companies to plan their strategy.

It is likely that businesses will not increase their activity until next year.

For companies to consider upping production and spending, prices would need to rise somewhere in the region $80 to $90 per barrel, even then this would only be after months of price stability.

It is too early to tell of the crisis has finished, however if oil prices continue to remain around $50+ per barrel, then 2017 will continue to look promising.

World production and world consumption have been rising and falling steadily, but there is hope that the markets may start to stabilize.

What is the effect on the economy?

Investors have already started to increase their stocks because of the rise in prices.

There have been talks in the market about the prices reaching $60 per barrel this year and continuing growth well into 2017.

The increase in oil prices should not concern consumers just yet, as gas prices should continue to remain low throughout the summer.

Any hardships felt by consumers will not be immediate.

Ultimately lower prices are better for the economy than higher prices, however currently economists are not concerned about the rise.

Advantages of rising oil prices

Higher oil prices may seem like a bad thing; however, there are some positives, which will come because of greater oil prices:

• People will turn to alternative energy sources
• People will find alternative methods of transport
• People will source local food
• The above will lead to fewer emissions

The future may seem bleak if oil prices continue to rise.

However, we live in a time where people are always looking for ways to save money.

In saving money, people may also help to protect the environment.

Disadvantages of rising oil prices

Despite the advantages, higher oil prices will understandably have people concerned. Increasing oil prices will have a negative impact:

• Costs will likely increase at some point
• People will be forced to make further cuts
• Vacations will become even more expensive

Higher prices will eventually hit everyone, and alternative solutions may not always be feasible or appropriate for everyone.

People are already finding their finances stretched; higher prices will mean that those living on the edge will find themselves edging even closer.

What is next?

The rise in oil prices to $50 per barrel is mostly positive, but what happens next mainly depends on whether prices continue to rise or if they fall.

If prices start to fall, then not much will change.

If prices continue to escalate then the markets will even out, and the oil crisis will be over.

A continued rise in oil prices does not come without risk.

If prices continue to increase then, oil companies will start to up their oil production until supply and demand are equal.

If prices then continue to rise then, there is a risk of the markets shift in the other direction where supply overtakes demand.

Conclusion

The price of oil has been a huge topic for a few years now, but the slump in price in January has had an enormous impact on the oil industry.

There have been signs of a recovery any plenty of people have been feeling hopeful that the oil crisis is over, but what does this mean for everyone else?

The rise of oil to $50 per barrel is certainly welcome by investors and oil companies, but the primary concern will be to the consumer.

Although users may not need to be concerned right now, they certainly should stay alert for the future.

The price of oil may not remain high or get higher although it is not impossible; therefore, all anyone can do is wait to see what happens.

The rest of 2016 and 2017 are promising to keep the oil industry on tenterhooks.