Ever since OPEC announced their production cuts the markets have hit irrational exuberance without examining the factors for why oil isn't rising anywhere near pre-crash levels. Moreover, there are eleven different causes for why oil is stuck in the 50-60 dollar range. Maybe it will rise into the high 60s and 70s, but for that to happen powerful market forces have to be overcome.
Yes, OPEC compliance is still important along with currency movements, but U.S output, according to weekly surveys is nearing 9 million barrels per day. That figure hasn't been hit since March 2016. Here are the distressing factors holding oil prices in the 50s.
In 2016, China's economy reported its lowest rate of growth in over a quarter of a century, because of restricting issues with looming debt and possible protectionist actions from the U.S. Though it seems China's economic fortunes have rebounded from 2016. Analysts at UBS point out: "China's debt-to-GDP ratio had risen to 277% at the end of 2016 up from 254% the previous year." New credit is now being used to pay debt servicing cost ratios. What this means for economic growth, and demand for oil imports in China is tough to quantify, since debt continues spiraling upwards.
Another mid-term threat comes from pipeline builders. Keystone XL pipeline builder TransCanada is primed to move forward and has already filed a new application. The Dakota Access pipeline will also be built as the political landscape changed for pipeline construction in the U.S.
Keystone XL could transport as much as 830,000 barrels of oil per day (bpd), and the Dakota Access pipeline will supply 500,000 bpd. More importantly, with the installation of the Trump administration, the business environment has changed for good, allowing for both abovementioned pipelines, and others to be build in the near future.
Iranian sanctions being lifted have allowed the National Iranian Oil Company (NIOC) to recover, and begin shipping crude to Europe. Whether or not they comply with OPEC production cuts will be difficult to quantify. What isn't complicated to understand is one of the world's former oil and gas leaders has the ability to bring vast amounts of new fossil fuels to an already oversaturated market. A recent report also stated:
"Global ship insurers were about to resume near full coverage for Iranian oil exports from next month without involving US-domiciled reinsures."
Related: OPEC Cuts Close To 1 Million Bpd This Month
The Iranian resurgence is a big reason why oil will have a tough time rising significantly in the coming months.
Baker Hughes has been chosen by Saudi Aramco to audit their oil reserves for their upcoming 2018 initial public offering. It is believed the Saudis hold roughly 15% of the world's known oil reserves, which translates into 261-265 billion barrels of oil at this time. Gaffney, Cline & Associates, a unit of Baker Hughes, will carry out the review. A $2 trillion dollar valuation has so far been placed on Saudi Aramco, and an influx of funds from the IPO allows the Saudi's to invest more in fossil fuel exploration.
In a symbolic move to help pay for strategic petroleum reserves (SPR) infrastructure upgrades, the U.S. is selling $375 million worth of oil from the SPR. Selling off this oil could shake markets.
U.S. shale continues to defy expectations by bringing new crude supplies online faster than OPEC or analysts predicted. On top of that, exploration on Federal lands, which are believed to hold up to 1/5 of the U.S.' known oil and gas reserves could soon start. The Trump administration's native-American policies during the transition period and into his Presidency are led by Markwayne Mullin, a U.S. Congressman from Oklahoma and Cherokee tribe member who chairs President Trump's Native American Affairs Coalition.
Recently Congressman Mullin said:
"As long as we can do it (drill for oil, gas and coal) without unintended consequences, I think we will have broad support around Indian country."
Now with red tape for drilling looking to be cleared, and possible privatization of their lands, this opens the door for more oil and gas drilling.
Related: 'Good' OPEC Compliance Pushes Oil Prices Higher
Libya and Nigeria - two conflict plagued countries which are currently exempt from the OPEC deal - are bringing new supplies back to the market. Ole Hansen, a commodities analyst with Danish investment banking firm, Saxo Bank, said:
"The speed at which the oil market rebalances depends on two volatile producers, Libya and Nigeria. Both are producing well below capacity, and as long as they see consistent improvement they will be able to increase production further."
Each country will pose a major challenge for OPEC and oil gaining price momentum unless more cuts come from OPEC or non-OPEC countries, which at this point in time isn't likely to occur.
By Todd Royal for Oilprice.com
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Todd Royal is an independent strategic consultant, researcher and author on energy matters based in southern California. More
Comments
Also notice how Russia moved into Saudi territory in China. With the cut backs the Saudis are losing their market share. Bad news when oil goes south. Although, the amount of long hedges will protect a lot of oil producers. This should be interesting.