Oil prices: The demand looks weak, the commitment strong

E
IA recently reported that this year (2017) will see a highly volatile oil price. From 30th November to hitherto oil prices have seen a considerable upward trend. The prices have fluctuated at times due to the build-up in inventory and increase in the rig count, and at times when the wave of uncertainty swept across the markets---as it did in case of Libya and Iraq. Kuwait, Saudi Arabia and others have reported to be cutting their production as per the agreement.

However, on the other hand US rig count continues to rise and has added up a few barrels. Many oil projects that were discarded last year to the fall in prices are now starting again e.g. Mad Dog and Kashagan etcetera. This is due to the positivity surrounding the markets of-late as this time the prospects of a sustainable deal remains firm. Saudi Arabia announced, few weeks back, that they have cut their production more than they had promised, bringing their production down to 10mbpd. Russia, although recorded a record production in November, is also reporting some cuts. But as market insiders observe their cuts will be gradual.

The oil producers (OPEC and NOPEC) plan to meet on 21st January as to see the effect of this incipient agreement. Here it is important to mention that the deal is valid for the first six months of this year. Meanwhile, any addition from, for example, Libya or Iraq, Iran and Nigeria can wobble the commitments also the possibility of an increased production from USA bodes ill for the future of oil prices. If this happens and the oil prices, which were supposed to go up (and are up-till now), do not reach economically suitable levels then the OPEC and NOPEC producers might sputter away from the table.

“The EIA revised up its projection for U.S. oil production for 2017, predicting output will grow by 110,000 bpd instead of declining by 80,000 bpd, which was last month’s forecast. Also “The EIA produced some profoundly bearish figures for oil in its most recent weekly report. Crude oil inventories jumped by 4.1 million barrels in the first week of January.” Reports the Oilprice.com. Chinese economic data do not seem quite promising as its exports fell by 7.7 pc. Also, the Chinese Premier indicated that the economy faces many challenges and that the GDP growth target may be revised from 6.6 % to 6.5%.

The demand side hence looks weak. But the commitment, strong. The fundamentals, same. The markets, optimistic. All these economic indicators cement only one thing: Certainty of uncertainty in the days to follow.

Osama Rizvi

Independent economic analyst, Writer and Editor

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