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Oil prices slip away from 2015 highs, but market remains tight
[SINGAPORE] Oil prices on Wednesday slipped away from two-and-a-half year highs hit the previous session as the gradual resumption of flows through a major North Sea pipeline made up for supply disruption in Libya.
But the two outages in quick succession have highlighted how much tighter global oil markets have become a year into supply cuts led by Opec (Organization of the Petroleum Exporting Countries) and Russia.
At 0210 GMT US West Texas Intermediate (WTI) crude futures were at US$59.74 a barrel, down 23 US cents from their last settlement. WTI broke through US$60 a barrel for the first time since June 2015 in the previous session.
Brent crude futures were at US$66.66 a barrel, down 36 US cents. Brent broke through US$67 for the first time since May 2015 the previous day.
The dips were a result of the gradual return of the 450,000 barrels per day (bpd) capacity Forties pipeline system in the North Sea. Flows through Forties will return to normal early in the New Year, operator Ineos said on Tuesday.
The gradual Forties resumption is helping ease pressure after an attack on a Libyan pipeline led to the outage of almost 100,000 bpd of supply.
Price pressure also rose after Saudi Arabia released its 2018 state budget on Tuesday, the largest in the kingdom's history, which was seen as an indicator that the world's biggest crude exporter would require higher oil prices in order to meet its financial needs.
"The Saudi budget and Libyan attack on a pipeline have driven prices sharply higher," said Greg McKenna, chief market strategist at futures brokerage AxiTrader.
Both the Forties and Libyan outages, which together amount to around 500,000 bpd, are small in a global context where both production and demand are approaching 100 million bpd.
But the disruptions highlight the fact that markets have tightened significantly a year into voluntary supply restraint led by top producer Russia and the Middle East-dominated Opec.
Data from the US Energy Information Administration (EIA) shows that following rampant oversupply in 2015, global oil markets gradually came into balance by 2016 and started to show a slight supply deficit this year, resulting in a reduction of global fuel inventories.
EIA data implies a slight supply shortfall of 180,000 bpd for the first quarter of 2018.
Opec and Russia started withholding production last January, and the current schedule is to continue cutting throughout 2018.
A major factor countering efforts by Opec and Russia efforts to prop up prices is US oil production, which has soared more than 16 per cent since mid-2016 and is fast approaching 10 million bpd.
Only Opec king-pin Saudi Arabia and Russia produce more.
The latest US production figures are due to be published by the EIA on Thursday.