2016 has been a chaotic year for oil prices, ranging from the capitulation of last January where prices were below $30 per barrel, to an inconsistent recovery, as a barrel of crude oil dipped below and crept above the $50 mark, where prices have remained at the beginning of 2017.
There were considerable challenges to the oil market last year, particularly from over production in a slow moving world economy.
Throughout 2017, there will be other significant barriers, including compliance on the agreement to cut production from OPEC and non OPEC members, by 1.2 million and 558,000 barrels of oil per day respectively.
A recent study complied by BMI Research has forecast that the market will dictate that Brent oil prices will reach $57 bbl in 2017, an increase of $2 from what was initially projected at the end of last year.
The main factor for the oil price prediction is greater compliance over the OPEC agreement, in collaboration with non OPEC members, in slicing down the amount of barrels of oil in the market, particularly in the first half of 2017.
As OPEC members are also targeting greater stability in the market, BMI believes that the organization will play more of an active role in market fundamentals, which will mitigate price swings.
The report stated that production figures for this month, would be the first indication of the commitment levels of OPEC members to crimping the volume of oil on the market, for the first half of this year.
BMI forecasts that compliance over the production cut deal will reach 73 percent for January, although a true assessment cannot be made until official figures are released.
Market sentiment is positive the study argued, over the level of cooperation by OPEC members.
Although if certain countries decide to continue oversupplying the market, it will have negative implications for oil prices, especially when factoring in the high ratio of long to short positions by commodity speculators.
BMI also highlighted in the report that the strong start this year for crude prices may be partly due to a broader financial rally, where stock markets and asset classes have performed better in the latter stage of last year and into this year.
Global crude stocks will be closely monitored this year, if cuts succeed in downsizing bloated inventories, reducing the amount of crude oil that is in storage that has burgeoned in over the past three years, which led to a contango situation in the market.
It is expected by BMI that the transition from oversupply to a balanced market will be completed midway through 2017, expedited by the OPEC and non OPEC production cuts, maintaining the upward price trend.
The most significant compliance on the deal over cuts is anticipated from the Gulf Cooperation Council (GCC), which mounts up to 831,000 barrels of the 1.2 million barrels per day to be reduced on the market via OPEC members.
The greatest threats to the output cut agreement, BMI believes are from OPEC’s no.2 – Iraq, due to their precarious domestic political situation, and Russia, alluding to their historically poor record of obedience to production deals.
Another major threat to oil prices are supply increases from countries who are not part of any OPEC or non OPEC agreement.
Nigeria and Libya represent the biggest production upswing risks, because of a ceasefire which is in place, and security concerns abating respectively.
Although a lasting scenario of an environment where oil production could be ramped up from both nations is not a core vision of BMI.
Alongside Iran, they are thought to have increased the production volume by around 260,000 barrels per day.
The United States could be the surprise package in raising oil output, as BMI have previously forecast falling shale oil supply, something that could turn around now the U.S. rig count is rising rapidly.
Further production rises are envisaged in Canada, the United Kingdom, and Congo Brazzaville.
On the demand side of the equation, China this year could also derail prices, as crude imports could slow down from what was a vibrant market last year due to heightened demand from independent refiners.
Abovementioned independent refiners are expected to be hampered by government regulations, such as a clampdown on tax evasion and illegal resale of imported crude. Related: SpaceX’s Next Act Is A Critical One
The value of the Yuan could also present issues, as the currency has fallen against the dollar over the past two years.
Low crude prices may have hitherto alleviated the cost of imports, but with BMI’s forecast of crude averaging $12 per barrel higher in 2017, the currency weakness is now set to have an impact.
Jim Ritterbusch, the president of independent consultants Ritterbusch Associates reflected: “I am less optimistic than most that we are going to see some strength for oil prices in the first quarter. Compliance on production cuts should start well this month, but I am not so confident as the year progresses, maybe from March.”
“During the first quarter of this year Brent I would guess will reach values $59.5 dollars per barrel, which would be a bit above where they were early this year.”
“As the year progresses the market I would expect to level out, and the crude market that could be dragged back to the $42 to 44 dollar per barrel mark.”
A lot more bullish is Citibank in their Energy Weekly report, concluded that oil prices began 2017 in a volatile fashion, with WTI rising by $0.27 per barrel and Brent by $0.28, and believe that prices could be a rollercoaster ride for this year.
OPEC cuts are already effecting the market in their view, as they are currently focusing on medium and heavy barrels. Dubai is feeling these market forces, and is responding with prompt spreads at around 20 to 30 cents, in what has become a contango market.
Christopher Main, the analyst on the Citi Research commodities strategy team, is also sure that the bullish conditions on oil prices will continue, due to GCC and Russian oil supplies falling.
Bearish pressures on crude are forecast to arrive from Strategic Petroleum Reserve sales from the United States, with 7.5 million barrels of light crude being transported to USGC refiners. Related: Four Factors Fueling Canada’s Oil Recovery
U.S. crude exports could have a crucial impact on oil prices, as there is currently a wide WTI-Brent spread, in contrast to a falling Brent-Dubai spread, increasing the allure of U.S. crude oil.
Citibank at the end of last year projected that the $50 bbl forecast for the final quarter of this year, will grow to towards $60 bbl in the second half of next year, a figure which has so far not been updated.
The investment bank also predicted that the Saudi view of a limited United States shale rebound for 2017 was misplaced, as shale producers are already looking to fill the gap in the market.
By Peter Taberner for Oilprice.com
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