[yt_dropcap type=”square” font=”” size=”14″ color=”#000″ background=”#fff” ] I [/yt_dropcap]t has not been a happy story hitherto for oil markets as the prices continue to be under pressure. The recent inventory build-up of 5million barrels has once again made the total number of stock piles touching a historic high i.e. 533 million.
The rig count as reported by the Baker and Hughes for the last week increased by 21 making the total 652 the highest since September, 2011. As I have mentioned in another article these ballooning inventories are going to thwart future efforts for stabilizing oil prices. Why? Because, the level of inventories is perilously high. Secondly, the US production is rising (from 8mbpd to more than 9mbpd) and it will continue to do so. The extension of Vienna accord corroborates the above argument. However, KSA has a catch-22 situation here. The first scenario where we can see the deal getting repeal will translate into, once again, each member drilling oil as per its own will. The outcome will be the prices will fall as a result of rising supply. The second scenario, where the cuts are extended, the prices will increase, which will result in more drilling activity by the Shale producers, subsequently, rising supply and the prices once again, falling/stalled. What the oil market need is stability. Also, demand.
So the questions: To extend or not to extend is not the main issue. This will only provide a ephemeral cushion for the oil prices for the short term. Mr. Fereydoun Barkeshli, Advisor to the International Institute of Energy Studies and Chairman of Vienna Energy Research Centre, shared his thoughts with me as “2017 may not prove an exceptional year for the international oil market. OPEC-NOPEC has already done a good job in curtailing price deterioration. However, stocks are still high and rising. United States has so far been the winner and has kept raising its shale output. For those OPEC watchers, the organization is traditionally not in the business of drastic or radical decisions. Market has to grasp the realities and OPEC determination to hold its decisions”.
The production cuts seem not to be working, they (oil producers) have to pull something else to stabilize the markets.
Oil Markets Ignoring Realities
Brent oil touched $68 last week. WTI is already past $60 mark. Inventories are down by 20% nearing to the five year moving average of 420 million barrels. But all is not hunky-dory with the oil markets. There are some wildcards at play right now. Temporary factors, driving prices up. The markets and observers need not to lose sight of what are the potential risks to this upbeat and probably short-lived phase of recovery.
Last year we saw the Kurdish referendum which resulted in a price hike. However, we didn’t know that 2018 will have another big surprise (distressing one) in its stock: Unrests in Iran. Slogans like “Death to Khamenei” cannot be taken lightly. Nor the killings that have ensued as a result of these protests. Government has warned to deal with an “iron fist” in order to control the situation which only seems to get worse. This is one of the factors that are drawing oil prices up, representing the typical relationship between any unrest/disorder/conflict in Middle-East resulting into a higher oil price. But matters are not that simple. If these unrests can translate into a higher oil price, it can also cause Iran, in case tensions escalate, to leave the Vienna accord. This can be due to more sanctions slapped upon the regime in case they take any serious action against the protesters or due to general economic problems that might result, once again, if matters exacerbate.
Pipeline outages also helped to provide some buoyancy to oil prices. Disruptions in Forties Pipeline, one of the most important in the world, gave prices a boost when the company announced that it can take a longer time to repair the hairline crack that appeared in December, 2017. However it is fully operational as of now.
The recent meeting wherein members of Vienna accord decided to extend their deal for the full 2018 year was another cause of merriment for the oil markets. But that caveat according to which the members will meet again in June to review the situation can be taken as a wicket-gate for the ones who want an exit. Russia has already signaled to take about an exit strategy. The oil executives in Russia are not happy to see the growing U.S. shale production and market share.Kingdom of Saudi Arabia has its own reasons. They have an IPO to take care of hence; they are trying to keep all these oil producers together. But the question might be asked: For how long? It is their company (Aramco) and their IPO. Not every country in the region has a plan to wean itself off oil.
What has become a necessary part of the narrative whenever discussion the future of oil, in terms of prices or usage, is of-course, United States of America. U.S’ shale production has risen from 8 million barrels in 2016 to 9.78 million barrels per day (latest). The estimates for future rise in US production are promising. What is also important, but obvious, to mention here about the vicious cycle that higher oil prices trigger. The solution to which is only a stronger demand.
Even though oil prices are at post-crisis high it doesn’t mean that the trend will continue. Sustainability is the most important and decisive factor. Geopolitical risk premiums are temporary. So are the pipeline outages (if in case there are any in future). Time and again, we have to remind ourselves of not getting carried away by these ephemeral rallies. We should look for something sustainable, permanent, and fundamental. Until or unless we find it, the search for higher oil prices should continue.
Shale growth, Geopolitical tensions and Re-balancing
It has been a wild ride for oil prices. November 4th, 2017, prime minister of Lebanon Mr. Hariri resigns, at night missiles from rebel occupied Yemen can be seen hurtling across the sky of Kingdom of Saudi Arabia. What begins next has been widely covered by all the major media outlets.
Crude Oil Bearishness Is Here To Stay
Despite seven weeks of inventory withdrawals, the global oil market has failed to translate this effect into a sustainable and significant oil price increase. Doubts remain. As reported, OPEC production has edged up. The compliance rate among OPEC and NOPEC members of the Vienna deal, extended to March 2018, has fallen. US production has added more barrels to global production.
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