Washington - Oil prices continue to lag despite efforts by supply-giants Saudi Arabia and Russia to reduce a stubborn glut in
world supplies. That's good news for US drivers looking for affordable gas
prices this summer - but not so great for oil companies who rely on robust
prices to boost profits.
"If oil prices remain below $50 a barrel, as they are
currently, that will keep gasoline prices low," said Pavel Molchanov, an
energy analyst at the investment firm Raymond James. "Our team's forecast
is for oil prices to recover, not tomorrow or next week, but over the next six
to 12 months."
For now, however, prices have hit a lull, falling nearly 10
percent since the last Organization of the Petroleum Exporting Countries in
late May. Another steep drop came Wednesday after two new oil market reports,
one showing tepid gasoline demand in the United States and the other showing an
increase rather than a cut in OPEC output.
The federal Energy Information Administration on Wednesday
said that US gasoline stockpiles rose by 2.1 million barrels to 242 million
barrels. For the second week, gasoline demand was weak, disappointing many
analysts and traders who had been looking for a rebound. The price benchmarks
for crude oil fell sharply after the report's release.
Meanwhile, OPEC, led by Saudi Arabia, has struggled in its
effort to reduce output for several months, hoping that it would bolster
prices. The Saudi effort comes against a background of the pending public offering
by Saudi Arabian Oil Co, known as Aramco. The state-owned oil giant is
preparing to go public at a price that could value the company at $1 trillion,
making it the most highly valued company ever to hit public markets.
But the International Energy Agency reported Wednesday that
rather than falling, the cartel's daily output rose 1 percent to more than 32
million barrels per day. The IEA said that increase was due to higher
production in strife-torn Libya
and Nigeria,
which are not bound by the group's production deal.
Other factors contributing to the oil surplus include
increased US
crude production, thanks largely to the advances in shale oil drilling methods
that include hydraulic fracturing, known as fracking.
US
crude oil production is expected to hit 10 million barrels a day next year,
which was unheard of just a few years ago when oil prognosticators believed
world supply had peaked or was close to peaking. But that was before US shale oil
advances kicked in.
Shale oil production accounts for more than half of US production.
And it is expected rise by 127,000 barrels a day in shale drilling areas in
July, boosting total output from shale to 5.5 million barrels a day. The
nation's drilling rig count has more than doubled over the past year.
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Despite an increase in US oil production, some analysts believe
the world demand is chipping away at the supply overhang and that an upward arc
from today's mid-$40 range is not far away.
"Global demand is growing this year at the same time as
global supply is down," Molchanov said. Molchanov said recent US growth in oil production is being offset by
steep declines in other non-OPEC countries such as China,
Mexico and Colombia.
Many oil companies, particularly the independent shale oil
producers who tend to be more nimble than the super majors such as Exxon and
Chevron, have learned to earn profits with sub-$50 oil. Still, the shares of
those independent drillers tumbled Wednesday as crude prices sank.
A rise to $70 would put profits in companies across the
board. It would also boost income for the OPEC and non-OPEC oil exporting
countries, many of whom are struggling to balance their budgets at lower oil
prices.