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October 30, 2017

Oil breaks $60, but bulls’ progress looks fragile

Oil breaks $60, but bulls’ progress looks fragile

US oil producers are increasing oil supplies to Asia undermining market power of OPEC in this region, which remains core consumer for the cartel.

For Asian buyers, this is a welcome event. They benefit from the diversification of the sources of oil supplies as well as rising competition between suppliers, which leads to price wars. Simply put, asian oil refineries are getting more suppliers to work with and thus more choice in terms of grades of oil. India received the first cargo of American oil – 1.6 million barrels on October 2 – a result of the June visit of country’s Prime Minister Narendra Modi to the United States, during which agreements were signed for the supply of 8 million barrels of oil to India.

The key factor boosting export of oil from the US is the price spread between Brent and WTI benchmarks. Usually the price of Brent includes a premium to the price of WTI and this backs the demand for cheaper US oil from foreigners. In early October, the difference in price between the two grades rose to a maximum of $6 per barrel in two years. Exports of oil from the US for the week ended September 29 reached a record 1.98 million barrels per day.

There are no bars for oil production in the US, while other regions such as OPEC capped output and this makes oil prices in the country lower than the world prices, so exports are growing to offset the imbalance. Exports of hard-to-produce shale oil from the US could rise above 3 million barrels per day by 2022, with a third of these shipments going to Asia, predicts Wood Mackenzie chief economist Ed Rowle.

This situation leads to serious changes in the global energy market, where the influence of OPEC is weakening. According to some experts, the United States has already taken Saudi Arabia’s title of “compensating producer” of oil and can have a serious impact on the market.

OPEC acknowledges the need to take into account the growing competition from the US, analysts say.

Nevertheless prices on Brent benchmark left behind $60 mark first time in month on signals of medium-term market rebalance. OPEC increases efforts to support the market, while global economy pickup improves outlook for consumer demand. Still the balance above $60 is very fragile as US production remains on growth track and could again offset reduced shipments from OPEC. Medium-term outlook on Brent remains bearish with next possible target at $58.50 level.

Optimism on Brent is quite stable for now but will be smashed at 62-63 levels

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