Oil price smashes $40 mark

The price of a barrel of Brent crude rose to $41.46 in New York last night, an increase of about 50 per cent from its 12-year low of $27 in January. West Texas Intermediate, the benchmark US contract, also hit a high for this year at $40.20, exceeding $40 for the first time since December, reports The Times.

Michael Hulme, a fund manager at Carmignac Gestion, the French investment group, said he believed that oil markets had bottomed out and were gradually recovering as a result of falling output from US shale producers.

“We are seeing a decline in US production starting to kick in,” he said, pointing to steep recent falls in production from the Bakken and Eagle Ford shales in North Dakota and Texas.

These rank among the most expensive US shale-producing areas and have become increasingly uneconomic since the decline in the oil price.

“On a 12 to 18-month view, oil prices should normalise back to the marginal cost of supply of at least $60,” Mr Hulme said. An agreement led by Saudi Arabia, Russia, Venezuela and other leading producers to cap output levels at January levels was also starting to take effect, making oil traders increasingly optimistic about prices.

Mohammed Bin Saleh al-Sada, the Qatari energy minister, said this week that about 15 producers in and outside Opec, accounting for about 73 per cent of global output, were backing the plan.

Mr Hulme said that big spending cuts by large oil companies were starting to have an impact on the market.

“We have taken a vast amount of money out of the capex spending system,” he said.

Wood Mackenzie, an industry consultancy, estimates that oil companies have cancelled or delayed investments worth nearly $400 billion since prices began falling in late 2014. About 1,000 rigs have been laid up and 250,000 jobs cut, putting a big dent in future output.

Colin Welsh, head of international energy investment banking at Simmons & Company in Aberdeen, said that prices were likely to stage a recovery during the next year.

“You can’t defy gravity. If you don’t spend any money on investment, then oilfields deplete even faster than usual,” he added.

Mr Welsh said that global oil production of about 94 million barrels a day was likely to decline by as much as 7 per cent this year because of investment cuts. The normal rate of decline was about 4 per cent. However, demand was robust, growing by 1.6 million barrels a day last year. “At some point the market has to rebalance,” he said.

Oil prices slumped from $114 in June 2014 to lows of $27 in January this year, after a decision by Saudi Arabia not to cut production to price US shale producers out of business.