Oil at a crossroads: what price waiting for the market to 2018

In late September, the price of a barrel rose to its highest level since end of 2016 — contracts for delivery of European Brent crude in the coming month exceeded $59, WTI began to give more than $52. But the psychological barrier of $60 is still to reach failed — the rise in prices has stopped and began to roll back. Will the new assault and what to prepare for in the coming months?

How long OPEC+ will be able to resist countries that increase production of oil? Photo: opteckscam

Hurricane re-grading

You must first understand why prices have climbed so high. Currently, the oil market, as always, no shortage of factors that have varied influence on the price dynamics.

Was the seasonal factors. It is primarily the next season of Caribbean hurricanes, which at this time seriously threatened the infrastructure of oil production and processing in the USA. A hurricane, like any natural disaster causes the market of protective reaction in the form of higher prices. But not so simple. You should pay attention to the difference in the maximum oil price of the American WTI and European Brent. The maximum gap between them, or rather, the lag in the price of American oil is also a consequence of the hurricane, reduce the demand for this variety from staying refinery. Considering the large volumes of raw materials in tankers, it is necessary to admit that the hurricane “Harvey” made the export of American oil to be the most dynamic.

Then the question arises, why so sharply went up Brent? Here, too, there is an additional seasonal factor effect, of course, and in the United States. This is the peak holiday season, a traditionally high demand for gasoline. But he’s the one absolutely can not afford so high to raise prices.

There are specific geopolitical factor held a referendum that supported the independence of Iraqi Kurds. A zone of instability spreading to the areas where the oil pipeline goes to the Turkish port of Ceyhan. This again widens the gap between the price of Brent and WTI. The European variety may again leave a significant gap.

OPEC+ on the pedestal

The decisive factor witakowski the price of oil up, were the results of expanded oil cartel in the composition of OPEC and member countries to limit oil production.

At the end of September in Vienna, a meeting of the monitoring Committee of OPEC+, which aims to track as a country committed for the freezing of oil production, comply with these conditions. The Committee is also mandated to provide recommendations on the adjustment of the terms of the agreement. It meets once every two months. It includes the representatives of Saudi Arabia, Venezuela, Kuwait, Algeria, Oman and Russia.

It is worth Recalling that OPEC and several non-organization countries agreed in late 2016 in Vienna on the reduction of its total oil production of 1.8 million barrels a day from October level, of which 300 thousand are in Russia. The agreement was signed on 1st half of 2017. In may, its validity was extended for nine months until the end of March 2018.

It started the meeting anxious. To Vienna has not arrived key figure in the construction of OPEC — Minister of energy of Saudi Arabia Khalid al-falih. But as it turned out, it was not a sign of anxiety, and confidence that everything is under control and moving in the right direction.

The main results of the last meeting of the monitoring Committee can count three.

First, the agreement is observed. There are monthly fluctuations in the levels of the total production, but in General, restraint is performed. Earlier, the countries-producers the particular discipline in performance of its agreements did not differ, but this does not apply to the execution of a transaction OPEC+. Critical success factor the implementation of the agreement — informal responsibility of Saudi Arabia for its execution by the OPEC countries and Russia — discipline joined OPEC countries.

Second, although no recommendations on the future extension of the agreement was not followed (the Minister of petroleum and mines of Venezuela, Eulochio del Pino told reporters that the decision on the Vienna agreement can be taken in November, and the Minister of energy of Russia Alexander Novak believes that the decision on the extension of the Vienna agreement can be made no earlier than January 2018), the monitoring Committee took an important further step in tightening control over the reduction in the supply of oil to the world market.

The fact that so far it was about the constraints and the relevant quotas only in oil production. But the market is beyond OPEC+ enters their exports of oil. The country has reserves of oil and the difference in the levels of its production and exports. Now at the initiative of Saudi Arabia, tracking the level of exports will be part of the work of the technical Committee, which will transmit its conclusions to the Ministerial Committee. This will reduce opportunities for formal compliance with the restrictions on mining with the growth in exports at the expense of data on oil refining and supplies.

Thirdly, in the work of the monitoring Committee took part representatives of Libya and Nigeria. These countries, members of OPEC, while exempt from commitments to reduce production in the framework of the Vienna agreement, since the oil industry suffered from internal armed conflicts.

According to the International energy Agency (IEA), in August oil production in Nigeria rose by 20 thousand barrels per day to 1.66 million barrels per day. Production in Libya declined by 140 thousand barrels per day, due to blockage of the fields in armed groups. As a result, the production in Libya has fallen to 870 thousand barrels per day.

The Minister of oil of Nigeria Emmanuel IBE Cacique said that his country could join the Vienna agreement, if will be released on production of 1.8 million barrels of oil per day. Libya is still so far from recovering its level of oil production, what specific figures are not called.

So, OPEC+ demonstrated in Vienna that it intends to continue its policy that the market responded.

photo: Ivan Skryplev

Slate shower

The question, however, is how long OPEC+ will be able to restraint in production, and now in the export of oil to resist to increase oil production in the United States. Have the attitude that the success of traditional oil producers is temporary. It expresses, for example, an analyst America Saint from consultancy Energy Aspects, he believes that OPEC has managed to achieve a balance of supply and demand in the oil market and, thus, achieved an increase in oil prices, but this situation will not last long.

Sen and those who agree with him are based on data from the latest report by the International energy Agency (IEA). According to IEA estimates, if the production of OPEC — member countries will amount to 32.7 million barrels per day, and in August the total production was AZN 32.78 million, on the market at the end of 2018 will be excess supply in volume of 300 thousand barrels per day. Excess supply occurs due to increased production in countries outside OPEC+, particularly in the USA, Canada, Brazil and Kazakhstan. In this regard, is far-reaching conclusion: OPEC strategically loses us shale companies.

Here is where to go from him, and seasonal factors: seasonal increase in demand for transportation fuels in developed countries is behind us, in front of the “pit of demand”, when the car season is behind us, and the heating has not yet arrived. So holiday high oil prices could be short lived.

But more long-lasting factors. U.S. shale companies continue to increase production, which this year could reach historically high levels, exceeding the 9.8 million barrels per day. Is shale oil is a threat to the growth of oil prices, as American companies continue to invest huge sums in the development of shale structures, primarily in the Permian Basin. So, only Chevron in 2018 plans to invest in the development of this province about $4 billion with the aim to increase production at this shale structure up to 400 thousand barrels per day in the next few years. According to the forecast of the second largest oil company, USA, by 2020 production within the Permian Basin will increase to 3.8 million barrels a day to 1.4 million barrels more than the current figure.

While plans to expand shale extraction remain plans. On the market there is a conditional and fragile price balance. However, more likely to shake it will it kancevica, though, and before them a lot of problems — reduce area of profitable production, there remains a large debt that is not in favor of expanding production at price levels that do not provide pay its debts.

In any case, austerity vitality OPEC+ will be seriously tested. And the ongoing struggle between OPEC and lancelike can lead to a new breakthrough price down.

Their contribution to the realization of such a scenario can make and foreign exchange market. If the U.S. Federal reserve will move to a more active recovery rate, and in favor of such a development said and rethinking of the threshold inflation — in his last speech fed Chairman Janet Yellen stated that it is not necessary to switch to a more active tightening of monetary policy, waiting for the exit of inflation on level of 2%, there are tax initiatives Donald trump, which, if it comes to implementing them, can push the rate up, the fed, the growth of the dollar will be one more argument reduction in the price of oil.


Anna BODROV, senior analyst “Alpari”:

Oil prices climbed last month too high on the background of the hurricanes in the Gulf of Mexico, activity in Libya, increased production by OPEC in General and Saudi Arabia in particular. Too rapid growth of prices for raw materials (+8,25% for Brent and +6,12% for WTI) pulled a legitimate doubts in the potential of continue shopping. Investors have preferred to fix a part of profit and see what happens.

Meanwhile crude oil reserves in the world remain high, particularly in the US, they are on a five-year high. Seasonal demand for fuel in the States is declining, forcing stocks to rise, coupled with the effect of the planned suspension of several oil refineries. Shale companies the USA intend to accelerate production even more, which will allow to increase export. It seems that the oil market is ready for sales, but prefers to wait for a better time to start reducing.

Mark GOYKHMAN, leading analyst GK TeleTrade:

The prices for oil affects primarily the fundamental relationship of supply and demand, and secondarily — the market yields of financial instruments and currencies. Limits on the growth of shale oil production is close to the highs. Now the US produces more than 9.5 million bbl./day, for the next year assumes the level of 10 million barrels./day. If not there will be a sharp increase in production in OPEC+ at the end of the agreement in the second quarter of 2018, the balance will remain at the market. This will support prices around the current levels of $50-55/bbl. mark Brent. The tightening of financial conditions in the United States, particularly the fed’s rate hikes, could actually reduce the profitability of speculative investment in oil as a financial instrument, but the impact of this factor will be very limited.

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