Oil prices to continue moving upwards in H216 as supply glut starts to shrink

Global oil prices are likely to move upwards in the second half of 2016 as the excess supply will begin to shrink. In the longer run, an increase in shale production is expected to keep the prices in check. To a greater degree, oil market has followed the trajectory of gradual tightening, except for a certain significant unpredictable lock-ins in production including Canada’s wildfire and rising political unrest in Niger Delta.

Shale oil production in the US began falling at a rapid rate in the beginning of 2016 and helped increase oil price after touching USD 27 per barrel in January, a 12-year low.

Meanwhile, the return of Iran’s oil barrels post the lifting of sanctions on its oil sector has put a downward pressure on the price. However, it has not been sufficient to counter the severe decline in the US shale production, robust demand growth and disturbances in production in Canada and Nigeria.

Hence, oil prices are likely to keep moving on an upward path in the second half of this year as the supply glut will start to shrink, said Nordea Bank in a research report.

However, the price growth next year is expected to decelerate as the US shale producers are likely to begin production again when the price stabilizes more than USD 55-60 per barrel. Increase in shale production is likely to restrict oil prices in the medium term as additional oil barrels from the US will decelerate the decline of inventories that will tighten the cycle.

“We expect the Brent oil price at USD 48/barrel in 2016 and USD 63/barrel in 2017," noted Nordea Bank.