- The Writer holds an MSc from Creighton University and is a PHD candidate in the Turkish National Police Academy

From the second half of 2014, the sudden decline in oil prices and its long continuation have badly affected oil producers and countries heavily dependent on oil export revenue. However, the winners have been oil importing countries which have been happy with such declines and wish to continue gauging oil prices for their economic provisions. Therefore, more attention has been paid on fluctuations in the oil market not only by those directly impacted but also those who are indirectly affected. As a result, the main determining factors for oil prices have been followed more closely with a more in-depth and broader analyses than previous speculation.

Let's look at first what happened in the oil markets last week in light of such indicators – the dollar index, weekly American Petroleum Institute (API) and Energy Information Administration (EIA) crude oil inventories, weekly U.S. Baker Hughes rig count as well as speculation.

Summary of previous week

The Brent oil price at $44.87 per barrel began the week with a decline due to the increase in U.S. dollar index following Donald Trump’s election victory. Prices further extended losses down to $43.53 in parallel with the increase in the U.S. dollar index during the day, but at the end of the day it settled at $44.72 with a climb along with the decrease in the U.S. dollar index.

The second day of the week started with speculation that OPEC members and Russia were conducting diplomatic talks on an oil cut, resulting in a price rise up to $47.25 per barrel in spite of the increase in the U.S. dollar index. The closing price fell to $46.96.

On the third day, the rise in weekly API crude oil inventories, which were announced at the end of the previous day, the high U.S. dollar index, and the more-than-expected rise in weekly EIA crude oil inventories offset the oil price increase and prices settled at $46.34 at the end of the day.

On the fourth day, the U.S. dollar index increased after Federal Reserve Chair Yellen made a speech in the U.S. Congress indicating that an interest rate hike was in sight. This possibility caused the prices to tumble to $46.02.

The last day of the week began with speculation that OPEC members were getting closer to reaching an agreement on an oil production freeze, thanks to Russia’s contributions in the OPEC talks. This resulted in a price rise, with the closing price per barrel at the end of the week reaching $46.81.

Undoubtedly, the U.S. dollar index had a big influence on oil prices shown in the clear negative correlation with the index and oil prices. Prices sharply dropped with the U.S. dollar index which became higher with the announcement of the termination of the FED quantitative easing (QE) program at the end of the December 2013, and the following interest rate hike in December 2015. Therefore, the timing of a FED interest rate rise is becoming more critical for the oil markets.

According to Yellen’s speech in the U.S. congress last week, the FED is looking closer to making an interest rate increase at the final Federal Open Market Committee (FOMC) meeting of the year that will be held on Dec. 13-14, 2016, and therefore, huge pressure will be put on oil prices leading up to and after the meeting. However, given that the financial markets are accustomed to reflecting such expectations into prices, oil prices could go up with a low U.S. dollar index after a Fed interest rate hike. For 2017 projections, the expectation and timing of an interest rate rise at scheduled FOMC meetings is another crucial factor to bear in mind.

Moreover, the president-elect Donald Trump will also have a big influence on oil prices through his economic policies. The financial markets are waiting to ascertain his interest rate (weak/strong dollar) policy. Nonetheless, it is unlikely that he will pursue a strong dollar policy to cut the U.S.’ foreign trade deficit, so it will be good for oil prices over the mid-term.

In the supply and demand dynamics, the current oil glut is very influential in shaping the share oil price decline. OPEC members and Russia have attempted to reach an agreement on an oil production freeze since last February when oil prices fell to $27-- the lowest price in the last 12 years.

The oil market awaits the official OPEC meeting results from Nov. 30, 2016. It seems a consensus on an oil production freeze will not be easy to achieve with Iran and Iraq’s oil production policy which appears to run counter to a production cut. However, both Iran and Iraq’s recently offered support to OPEC will be put to the test at the upcoming meeting. To further complicate matters, OPEC and Russia’s production have been increasing instead of decreasing. Furthermore, U.S. Baker Hughes rig counts have increased for the last 25 weeks, with the exception of the three weeks when prices settled above $40. All these influences indicate that any price above these levels would be at a break-even point for oil producers in resuming their investments.   

On the demand side, it seems global oil demand will not revive in the short term as the Organization for Economic Cooperation and Development, the IMF and the World Bank reports revised down global growth. China’s economic growth slowdown in recent years is also a big disappointment in potentially increasing oil prices. On the other hand, India’s economic growth rate in recent years has been good news for oil prices. Furthermore, OPEC World Oil Outlook 2016 revised its medium term outlook to 2021 by 1 million barrels per day more than its previous yearly outlook for global oil demand.

The two major indicators which will influence prices in the short term include the FED interest rate hike expectation at the FOMC meeting in December -- namely a high U.S. dollar index -- and an oil production freeze resolution at OPEC’s official meeting.

The FED could increase the interest rate in December, and the likelihood of a consensus on an oil production freeze remains slim. Oil prices will potentially strike a balance in the range between $45 and $53 in the short term.          

- Opinions expressed in this piece are the author’s own and do not necessarily reflect Anadolu Agency's editorial policy.