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2017 Another Year Of Excessive Volatility For Oil Prices

Fatih Birol

This year will see further volatility in oil prices despite international efforts to restore the market to balance and improve prices more consistently. This push may, however, rebalance the market in the first half of 2017, according to the chief of the International Energy Agency, Fatih Birol, who spoke to Reuters.

Birol said that the prospects of rising global output as a result of the market rebalancing work of OPEC and 11 other producers will be one of the factors to contribute to this more intense volatility. Another will be the very fact of higher prices, which are bound to affect demand trends. A third factor could be rising production in China: oil production in the world’s second-biggest consumer has been declining because of the low oil price environment, so now that prices are improving, Chinese E&Ps may get the motivation they need to revert to production growth.

U.S. oil output is already rising, and it has been for much of the second half of 2016, reaching 8.95 million barrels per day in the week to January 6, 2017. The active rig count across the country stood at 659 as of January 13, of which 522 were oil rigs. Although the total number marked a weekly decline, the short-term trend is upward, according to analysts, as shale producers take advantage of the higher oil prices. Related: U.S. Shale To Kill Off Oil Price Rally

The OPEC members that were exempt from the production cut are also pumping more, and are unlikely to suddenly stop doing it even if prices fall back to US$50 a barrel.

There is also the bearish sentiment among investors to consider, caused in large part by OPEC’s history of cheating in market-rebalancing endeavors and a lack of definitive evidence that everyone that is party to the deal is indeed cutting production.

This sentiment was last week reinforced by growing uncertainty about the direction in which the global economy is heading, thanks to the latest economic data from China. The country’s December 2016 statistics revealed that overall exports for 2016 declined by the most since 2009.

By Irina Slav for Oilprice.com

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  • Mrinal on January 17 2017 said:
    All the speculators are on the one side of the trade. They can influence the price of oil to the downside as there is ample storage which needs to released because of contract expirations. As the storage gets drawn it is not going be replaced soon as there is just not enough margin between spot and future. Over a period of time, when the storage runs dry the fun will begin.

    The permabear like John Kilduff, Stephe Shork will become permabull, but only after oil breaks through $75/barrel. The market is in long consolidation and upside breakout will be fast will and furious. If once tries to time it he will completely miss it or get in at the top unless he is lucky. Remember the producers have missed trillions and they cannot let this continue.

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