Oil prices top $50 a barrel for the first time in 2016

Prices have been moving up recently and they augur higher prices at the pump for consumers. Photo / Getty Images

The price of crude oil popped over $50 a barrel Thursday for the first time this year bolstered by declines in US stockpiles, gradually rising global consumption and steady declines in US shale oil production.

The US benchmark grade of oil, West Texas Intermediate, closed the day down slightly at $49.35 a barrel and the international benchmark Brent grade settled at $50.09 a barrel.

But prices have been moving up recently and they augur higher prices at the pump for consumers. The increase in crude oil prices comes just before the Memorial Day weekend, and shortly before the summer driving season, when American gasoline consumption, which accounts for about one of every 10 barrels of oil produced worldwide, tends to rise.

The bounce marks a reversal from earlier this year, when the price of the West Texas Intermediate benchmark grade of crude oil plunged below $27 a barrel in early February.

Oil prices are still well below the $100 a barrel level they averaged from 2011 to 2014, when Saudi Arabia decided to open its taps and let the price drop to protect its share of the global oil market.

US oil companies pulled back as prices fell, and the y still haven't revved up the pace of drilling needed to keep up steady shale oil production. The US onshore rig count, according to oil services firm Baker Hughes, was just 375 in the week ended May 20, down 56 percent from 853 a year earlier.

"The best cure for low oil prices is low oil prices," said Jason Bordoff, director of the Center on Global Energy Policy at Columbia University. "They are doing just what the Saudis intended, causing supply to come offline and demand to grow."

On the supply side, some oil output has been curtailed on a temporary basis by a strike by French refinery workers and wild fires in Canada that reduced output there by as much as 1 million barrels a day.

Bordoff said that low oil prices were causing unrest in oil exporting countries. For instance, he said the drop in revenue in Nigeria had made it harder for Nigerian President Muhammadu Buhari to maintain payments to rebels in the oil-rich Niger River delta and as a result rebels have disrupted oil supplies there. He also said that low oil prices helped push Venezuela into a downward spiral, hurting its ability to maintain oil output.

But moderate output is also a long-term phenomenon. Sharp cutback in capital spending by major oil companies could curtail oil output for years.

On the demand side, Bordoff said that global oil consumption is expected to grow twice as much as it did in 2014 when Saudi Arabia decided to flood the market and bring down prices.

Predictions made years ago by some energy experts that US motor fuel consumption had peaked and started a steady decline appear to have been wrong. Last month, US gasoline consumption climbed back to 2007 levels, the highest ever, and is expected to surpass that later this year.

Sales of large sports utility vehicles have gone up by about 11 to 12 per cent while sales of hybrid cars have dropped by the same percentage. The average fuel efficiency of new cars sold has fallen from the peak and is about the same as it was two years ago, according to the University of Michigan's Transportation Research Institute.

Many experts believe that unlike earlier sharp swings in oil prices this time US shale oil will moderate rising prices because more production will come online as prices recover.