Uncertainty is dominating today’s oil markets, with production cuts, ballooning inventories and a rising rig count all adding to oil price volatility. And as the summer driving season approaches and oil companies return to their projects here are four key factors to watch closely.
Inventory, Rig counts – An significant inventory build on the 7th of March sent oil prices tumbling, ending a period of relative stability for oil markets. The build-up of 8.2 million barrels at Cushing, Oklahoma sent prices below the psychological level of $50. The next week saw a draw of 237,000 barrels, providing the investors and market with some much needed breathing space. The most recent inventory report saw a 5-million-barrel build, adding yet more downward pressure to oil prices. The inventory level now rests at 533 million barrels, the highest in history. At the same time, we have seen a rapid increase in the number of active oil rigs in U.S. The total number now stands at 652 after an increase of 21 rigs last week according to Baker Hughes. This is the highest level since September 2015. Given the remarkable adaptability of shale producers to low prices, these trends are likely to continue, adding yet more downward pressure to oil prices.
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The OPEC deal-Extension or no Extension: Questions surrounding the possibility of an extension to the current OPEC deal can be heard in all corners of the oil market. But attempting to make sense of the mixed signals coming from OPEC’s various members is not only a fool’s errand, but an insignificant one. The outcome of both scenarios: extension or no extension, are going to yield the same results. If OPEC does extend the production cut we will see the same vicious cycle: prices will rise, more rigs will be added in U.S., production will increase and prices will stall. On the contrary, if the OPEC and NOPEC members do not reach an agreement then we will see what we saw in 2014-16, each producer will ramp up production vying for the market share. This will cause prices to either go down or to once again be stuck in limbo. A third scenario may see OPEC members agreeing while NOPEC nations leave the table. Russia is already preparing for $40 oil. Oil analyst Baruch of IITRADER while speaking to Bloomberg explained how U.S. production has risen from 8.7 million barrels to more than 9.1 million, and that he expects it to rise further. Iraq’s oil minister says that the “fate of OPEC’s output cut depends upon how the market responds’’. Well, the response is not going to be a promising one except for a temporary price rally. Even if the OPEC members were to agree to an extension, the world is only going to believe hard tangible facts, not rhetoric. But markets will have to wait until May to find out how the OPEC production cut saga will develop.
Summer Driving Season: This summer driving season might provide some cushion for oil prices. According to Jason Schenker “This year, the seasonal upside could be even greater than normal. With the lowest U.S. unemployment rate since before the recession of 2008, and two consecutive years of record SUV and light truck sales in 2015 and 2016, the coming summer driving season is likely to show records for miles driven and gasoline demand. In fact, there has been a record number of miles driven every month since December 2014. And a continued trend higher in the 12-month moving total of U.S. miles driven is likely to continue throughout 2017.” According to an article in Reuters, U.S. auto sales will remain strong in 2017 around 17.6 million.
E&P Projects: While the IEA recently stated its concerns about a lack of new projects creating a lack of supply, the recent uptick in prices has led many oil majors to restart their once abandoned projects. There are not only more projects coming on-line but the payback time has also decreased significantly. Goldman Sachs reports that the rising Shale production and the flurry of new oil projects may “result in an oversupply in the next couple of years”. Wood Mackenzie predicts that new oil projects will double in 2017 as it sees spending getting a 3 percent boost this year.
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These are sure to be the four key factors in the oil markets in the near future and should be closely watched by any market observer eager to understand where oil prices are headed.
By Osama Rizvi for Oilprice.com
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