- The Writer holds an MSc from Creighton University and is a Ph.D. candidate in the Turkish National Police Academy
Brent oil price continues to remain below $50 and even fell below $48 due to the production rise from OPEC and producers outside OPEC. Last week, the Fed applied a further interest rate hike in line with its rate projection for 2017 pressuring oil prices.
Oil markets last week will be reviewed based on the U.S. dollar index, weekly American Petroleum Institute (API) and Energy Information Administration (EIA) crude oil inventories, weekly EIA field production of crude oil in the U.S. and the weekly U.S. Baker Hughes rig count.
Brent oil price began the week with a rise to $48.29 through a decrease in the U.S. dollar index despite an eight-count rise in the U.S. Baker Hughes rig count from the previous week. It continued its ascent to $48.72 on Tuesday through a further decrease in the U.S. dollar index, despite a weekly increase of 2.75 million barrels in U.S. oil inventories as reported in the weekly API report.
On Wednesday, the lower-than-expected decrease of 1.661 million barrels in U.S. oil inventories and an increase of 2.096 million barrels in U.S. gasoline inventories as reported by the Energy Information Administration (EIA) weekly report caused the price to plummet to $47. This price reduction also resulted from greater production to 9.33 million barrels per day in the U.S. ending June 9 as reported by the U.S.’ weekly EIA crude oil production, despite a slight decline in the U.S. dollar index.
The price continued down to $46.92 due to a rise in the U.S. dollar index on Thursday. However, it regained some of its losses and settled at $47.37 through a decrease in the U.S. dollar index at the end of the week despite a six-rig count rise in the weekly U.S. Baker Hughes data.
In brief, oil prices stayed below $48 mainly due to the high level of inventories in U.S. oil and gasoline, and despite higher demand generated from the U.S. driving season. Prices fluctuated through changes in the U.S. dollar index before and after FOMC meeting last Wednesday, June 14 when they raised the interest rate by 25 basis points to a range between 1.00 percent and 1.25 percent.
In 2015 and 2016, the Fed took a dovish stance applying one interest rate rise each year. Within six months after Donald Trump’s inauguration in January 2017, the Fed took a more hawkish tone and applied two more interest rate hikes without any objections from Trump. Therefore, it is highly likely that one more interest rate hike this year is on the cards in line with the Fed’s projection for the year. Oil markets will focus on pressure on the global oil supply and demand balance from the anticipated interest rate rise and the subsequent strong U.S. dollar until at least the end of this year.
According to OPEC’s monthly report in June 2017, OPEC’s crude oil production increased by 336,000 barrels per day to 32.14 million barrels per day in May 2017. This rise came mainly from Libya, Nigeria and Iraq. Furthermore, oil production outside OPEC is expected to grow by 0.84 million barrels per day to 58.14 million barrels per day in 2017.
If the rise in the U.S. rig count and accordingly in U.S. oil production continue with prices even over $40 for West Texas Intermediate (WTI), then it would be unsurprising that OPEC, led by Saudi Arabia, and non-OPEC led by Russia would further cut production by 300,000 barrels per day from their existing oil cut agreement as pledged in the oil cut deal extension until the end of March 2018.
To determine prices going forward, markets will closely watch changes in the U.S. dollar this week following the Fed’s interest rate hike last week. Rises in oil prices towards $48 could be seen if strong declines in U.S. oil production and U.S. oil inventories occur. If not, declines towards $45 are likely.
- Opinions expressed in this piece are the author’s own and do not necessarily reflect Anadolu Agency's editorial policy.