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January 2, 2017

Oil market overview: Will prices go over $60?

Oil market overview: Will prices go over $60?

January came and the pact between the oil producing countries necessary to reduce production in order to maintain prices came into force. The first data on production cuts could begin flowing within a few weeks – right when Donald Trump will take over the office in White House

OPEC has pledged to cut output by 1.2 million barrels per day, while countries outside the cartel agreed to reduce daily production of nearly 600 thousand barrels.

According to research by the Federal Reserve Bank (Fed) of Dallas, conducted in December, 58% of respondents believe that the OPEC agreement will not be honored in full extend. Less than 50% expect that the market will reach the oil supply and demand balance in the third quarter of 2017. The survey involved 147 energy companies. Among respondents 67 companies engaged in exploration and production, and the remaining 80 – service companies.

Meanwhile, rising oil prices caused by the signing of agreements in OPEC helps to unfreeze shale production in the United States: the number of active drilling rigs increased from mid-2016 and has already equaled the levels of the beginning of 2016. According to the Energy Information Administration (EIA), in November, their number reached 401, the highest since January last year. That may be enough to start up production.

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Baker Hughes data has been showing consistent increase in drilling activity in US: from ~320 rigs to 525 in December. Source: Ycharts.com

 

 

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US crude stocks change has been declining consistently after OPEC clinches deal on cutting production, strong signal on prices rally. Source:Myfxbook.com

 

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Long positions on crude oil (green) rose over 600K while short positions fell steeply in December to 160K (purple). With such difference in bull’s and bear’s forces oil has good chances for renewing current peaks. Source: CFTC COT positions. 

According to EIA estimates, in the new year, production of raw materials in the US from shale formations will grow. The budget for the investment of American companies producing oil, rose by 13-20%, it said in the department report. Production of shale oil has reached its peak in March 2015 (5.461 million bpd) and is expected to be less than record by 919 thousand barrels in January. EIA estimates that the total oil production in the US will grow by 250 thousand barrels by the end of 2017.

Significant risks to the stability of the OPEC agreement also creates growth in oil supply from Libya and Nigeria. So, in December, Libya has resumed production at two major oil fields.

Meanwhile, the question of how the oil producers will comply with the agreements and how it will be controlled, remains open.

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