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Oil Prices Aren’t Breaking Out Any Time Soon

Barrels

What’s in store for oil this year? Experts at ABN Amro are forecasting a return to $30 levels unless OPEC extends its production cuts. Meanwhile, analysts at Citi are of the opinion that oil is likely to reach $70 a barrel by the end of this year.

Bank of America Merrill Lynch has opted for the middle path; they believe that the Brent crude oil prices will remain in a range of $50-$70 per barrel till 2022.

Such differing forecasts make it difficult for the trader. This article will analyze the fundamentals of oil to arrive at a forecast for oil.

The current rally is boosted by OPEC

The production cuts by the OPEC members and Russia to balance the oversupplied crude oil market is the only reason for the current rally. OPEC has achieved about 90 percent compliance rate on the proposed cuts in January 2017, whereas, the non-OPEC members who had supported the cuts have achieved 60 percent compliance.

However, even after achieving close to their targeted 1.8 million barrels a day of production cut, the huge stockpiles have not reduced. On the contrary, U.S. crude stocks have risen 39 million barrels this year, to 518 million, since OPEC started cutting production in January. Related: Can The U.S. Dominate LNG Markets?

(Click to enlarge)

This prompted the Qatar Energy Minister, Mohammed Al Sada, to say that OPEC is watching the reduction in oil stocks closely.

Depending on the rate of decline, OPEC will formulate their next strategy, OPEC Secretary-General Mohammad Barkindo said.

Why oil prices are not rallying higher

(Click to enlarge) 

Though the breakout in oil has attracted bullish bets of more than 1 billion barrels of oil, prices have been stuck in a range of $50-$55 for the past few weeks. One of the main reasons for the tight range is the resurgence of U.S. shale oil producers.

They have not only added oil rigs, they have also increased oil production by about 500,000 barrels per day since October 2016.

"We believe U.S. shale oil producers will come out ahead and deliver outsized market share gains by 2022. Assuming a gradual recovery in oil prices into a long-term average of $50 to $70 a barrel, we project annual U.S. shale oil growth of 700,000 b/d in 2017-22," a note by the Bank of America Merrill Lynch’s research team predicted, reports the CNBC.

Though the shale oil drillers haven’t been able to replace each barrel of oil production cut by OPEC, they have dented the bullish sentiment to a large extent. Expectations are that more shale oil producers will enter the fray if oil prices reach $60 a barrel or higher.

Hence, prices are stuck in a range, waiting for some kind of a trigger to either take it higher or lower. Related: Why A Weaker Dollar Won’t Boost Oil Prices

Can OPEC continue with their cuts if oil prices don’t rally?

The initial agreement was to cut production for the first six months of this year. However, if needed, OPEC can extend the cuts for another six months, OPEC sources said.

Nevertheless, if oil fails to rally soon, the unity and resolve of the OPEC members will be tested. OPEC will not want to lose market share to the U.S. and other producers, as it is very difficult to regain the market share lost in an oversupplied market.

Saudi Arabia and other producer countries are feeling the pain of low oil prices and thus will likely stay the course if cuts prop up prices,” said Jason Bordoff, director of the Center on Global Energy Policy at Columbia University. “But the deal may unravel if those cuts are just offset by strong non-OPEC production growth in places like the U.S., Canada and Brazil that keeps prices low,” The New York Times reported.

Hence, considering the fundamentals of oil, it is likely to remain range bound between a broad range of $45-$55 for the most part of the year. However, in the near-term, a pop to $60 is likely, which will be sold into and crude will be back into the range. The range is unlikely to break convincingly in the near future.

By Rakesh Upadhyay for Oilprice.com

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Leave a comment
  • adec on February 26 2017 said:
    This author has no clue what he is writing about.
  • Jhm on February 26 2017 said:
    I think OPEC needs a different strategy. OPEC member could agree that all incremental production be hedges with futures or sold in forward contracts. This would tilt the futures curve into backwardation and drive surplus inventory out of storage. Other producers would be forced to hedge likewise or cease growing production. Once the surplus inventory is removed, the price of oil can return to profitable levels.

    But as it is, their current strategy simply cedes market share to non-participants in the freeze and does nothing to clear inventory.
  • CharlieR on February 27 2017 said:
    There increasingly appears to be an agenda behind a number of these articles particularly where US stocks are mentioned, without looking at the numbers in any detail, and particularly at historical trends.

    In the 7 weeks of EIA reports this year the following changes in stocks have been noted.

    Crude Oil +35.6m boe
    Gasoline +15.9m boe
    Total Stocks +13.6m boe

    However in 2016 the following changes were noted
    Crude Oil +25.1m boe
    Gasoline +16.1m boe
    Total Stocks +13.9m boe

    And in 2015
    Crude Oil +46.3m boe
    Gasoline +29.8m boe
    Total Stocks +20.5m boe

    It is quite clear that a seasonal trend exists, and in fact, out of 5 of the 6 comparisons only one is showing a higher build in 2017 compared with 2016 and 2015. This is all in the context of production + net imports, and Crude sent to refineries being higher in 2017 than in the comparative years.

    It would be fantastic if the authors would put context behind their articles as per the above data, as it is quite clear that the US build in stocks this year could actually be described as low in comparison to previous years, and is more a function of imports rather than shale increases, at least so far in 2017.
  • the earl of dudley on February 27 2017 said:
    Hahaha Merrill Lynch at least admitting they have no idea about anything and just picking a number in the middle.
    Absolute morons.

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