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

Both OPEC and non-OPEC countries, which have long suffered from the oil price decline since 2014, have finally reached an OPEC agreement to cut production on Nov. 30 after challenging negotiations. The deal was hailed as a great success given the fact that it was not easy to bring 25 countries with conflicting interests to the same table to discuss their concerns. Even though the deal could be perceived as being late, nonetheless, it shows that sustained low oil prices became intolerable. Now the oil markets are awaiting the U.S. Federal Reserve’s (Fed) decision on the possibility of an interest rate hike this week, and its projections for 2017. This decision and the year’s predictions are very crucial for both oil markets and emerging markets which have been the most important contributors to global growth over the past 15 years.

Let's look firstly at what happened in the oil markets last week in light of indicators leading up to the non-OPEC meeting in Vienna last Saturday -- 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 surrounding the meeting.

-Summary of previous week

The Brent oil price began the week with a decline to $53.77. This was due to the increase in U.S. Baker Hughes rig count from the previous week and the fall in the U.S. dollar index following the referendum in Italy. However, prices regained their losses through the decline in the U.S. dollar index during the rest of the day and settled at $54.94 at the end of the day.

On the second day of the week, prices declined because of the increase in the U.S dollar index with expectations that the European Central Bank (ECB) would raise or continue money supply through bond buying, so prices settled at $53.93 at the end of the day.

The third day started with speculation resulting from doubts over a non-OPEC oil cut agreement to be held in Vienna. In addition, the revision in the forecast of the fall in domestic production to be lower than expected for 2017 in the U.S. Energy Information Administration’s latest report also contributed to the uncertainty. In spite of such speculation and production forecast, prices dropped and succeeded in settling at $53 at the end of the day through declines in weekly API and EIA crude oil inventories in line with expectations as well as the decrease in the U.S. dollar index.

The fourth day started off awaiting the ECB interest rate and its decision on bond buying. Prices boomed and settled at $53.89 at the end of the day after the ECB’s decision that the bond buying program would be extended at a slightly lower amount until the end of 2017.

Following the ECB’s decision, the price rise lasted with positive expectations from the non-OPEC meeting the following day, and settled at $54.33 despite the highest addition in the weekly U.S. Baker Hughes rig count since July 2015 at the end of the day and week.

The non-OPEC meeting on Saturday resulted in an oil production cut of 558 thousand barrels per day for six months starting from Jan. 1, 2017 – slightly lower than 600 thousand barrels stated in OPEC’s agreement. However, there are some uncertainties lingering over the successful execution of the deal which could impact prices during the term of the agreement.

• Claims that some parties’ production in the deal was already in natural decline for a while, give rise to the question if this was taken into account in the deal
• Saudi Arabia and Russia have boosted their production and even reached their highest levels in recent months, so oil markets could question if such a curb in their production is genuine.  
• The historical doubts over the implementation of such an oil cut agreement between OPEC and non-OPEC are apparent.

Nonetheless, the deal seems to show that suppliers have done their part to remove the surplus supply by curbing oil production for six months. The parties stress that their aim is to initially stabilize oil markets by balancing global oil supply and demand, to keep prices initially over $53 per barrel for financial security and then increase this to a range of between $55 and $60 without enticing shale producers rather than targeting prices over $100. It is unclear if this is achievable based on the agreed production curb, but it is an initial step in the right direction to contain the downward trend while waiting for demand to increase. 

However, currently the slowing world economic growth in emerging markets is insufficient to support prices and escalate demand, particularly in China, and with the exception of India which has been mostly bearing an increase in oil demand for almost 15 days. Therefore, emerging markets need cheaper financing to invest more, and consume more oil. The valuable U.S dollar has not allowed these markets to find cheaper financing for a while because of the Fed’s decision in 2013 to stop Quantitative Easing along with the possibility of a further interest rate hike. Therefore, the Fed’s decision to put up interest rates are becoming more important for emerging markets.

All financial markets are also awaiting the Fed meeting this week and its results, but markets will focus on its interest rate projections rather than the rate decision because a possible rate hike in this meeting would have already been reflected in the U.S dollar index.

Markets also seeking a possible radical shift in U.S economic policy after Donald Trump takes office in January. Trump’s win suggests that global growth could be mobilized via the real economy as opposed to the Democrats who have been following the virtual economy. Trump also looks as if he will take a more competitive stance to return a weak U.S. dollar policy through lower interest rates, which in turn can boost global growth and oil demand. Given Trump’s view on oil companies in the U.S., it appears that he would prefer U.S. oil sales at higher prices.   

To sum up, the Fed meeting this week will have an undeniable influence on the route that prices will take on the demand side, considering OPEC and non OPEC members’ oil cut deal on the supply side. While prices will seek a balance in the range between $55 and $60 in the short term – for the first half of 2017, in light of recent developments, it is possible that prices could return to balance in the range between $45 and $53 after the Fed meeting. The Fed may also relieve oil markets resulting in price movements over $60.

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