Crude Oil Rises on Wishful Thinking

February 12, 2016 by Paul Ausick

It looks like the crude oil market is getting set to once again tempt investors and traders with higher prices, only to pull the football away at the last instant. Once again, the triumph of hope over experience, at least for a day or two.

This time the cause for enthusiasm appears to be comments by the energy minister of the United Arab Emirates (UAE) that OPEC is willing to cooperate on production cuts in order to raise prices. Stop me if you’ve heard this one before.

The UAE had an average of 48 oil rigs working in 2015, four times more than their average number during the period from 2005 to 2010. The country’s production has risen 11% since 2011, although since last November production has dropped by about 11,000 barrels a day. The UAE produced a daily average of 2.874 million barrels, the fifth-highest total in the cartel.

Even if the UAE could make good on its comments, it would have almost no impact in the short term. But the chances that OPEC would cut production now are essentially slim and none. The Saudi-backed plan of fighting for market share has taken some time to show any effect, but it is working. Production in the United States is falling and is expected to continue to do so throughout 2016. The Saudis have consistently rejected any effort to cut production, and there is no reason to expect anything different this time.

West Texas Intermediate (WTI) for March delivery rose as much as 6% early Friday, following the UAE energy minister’s remarks. Crude traded up about 4.7% at $27.42 about an hour before U.S. markets opened. WTI settled at $26.21 on Thursday.