- The Writer holds an MSc from Creighton University and is a PHD candidate in the Turkish National Police Academy
OPEC and non-OPEC members led by Russia and Saudi Arabia took action by applying oil cuts of nearly 1.8 million barrels per day to stop their financial woes from low oil prices over the past two years which was then followed by the U.S. Federal Reserve (Fed) decision to implement an interest rate hike.
The Fed held the final Federal Open Market Committee meeting (FOMC) of the year last week on Dec. 13-14, which was the most awaited event of the year for financial markets including the oil markets. According to the FOMC, the Fed increased its target range from 0.25-0.50 to 0.50 -0.75 as expected. Its predictions for 2017 point to three more interest rate rises. However, this projection does not seem realistic given that last year, four interest rate hikes were projected and only one was actualized.
Developments in the oil markets last week will be reviewed based on indicators leading up to the FOMC meeting and after the non OPEC contribution to curb oil output, the U.S 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 speculations during the week;
Brent oil prices began the week with a climb to $57.89 thanks to non-OPEC members oil cut as promised in the OPEC’s deal. But this increase was offset following the FED’s decision to raise its interest rate and the weekly API report recording a rise in U.S oil inventories. And this is in despite of the International Energy Agency’s oil demand surplus claim for the first half of 2017, based on the OPEC and non-OPEC oil cut agreements.
Subsequently, a sharp increase in the U.S dollar index after the Fed interest rate hike and its projection for 2017 resulted in quick drop to $53.52 per barrel. However, the EIA report then showed a decrease in U.S oil inventories which halted the price from falling further and prices recovered their losses with the abatement on the U.S dollar index despite the continuous rise of the U.S Baker Hughes rig count and prices settled at $55.21 at the end of the week.
Although OPEC and non-OPEC members did their best to balance oil prices, Saudi Arabia says it will take further steps without hesitation to stabilize the oil market if needed. The Fed and the U.S dollar index, in particular, are putting sustained pressure on oil prices and stemming a price rise. It looks as if OPEC and non-OPEC members have achieved their goal and have kept prices at over $53 for Brent and $50 for WTI.
For their next goal to raise prices to $60 per barrel, oil prices need some stability.
Historically, OPEC and non-OPEC oil cuts have experienced difficulties in achieving their targets in such agreements, so if this trends continues, it will be merely speculation as to how oil prices will pan out in the first half of 2017 given the uncertainty.
Global oil demand, mostly arising from emerging markets, should also grow for market balance and further price increases. India has taken the lion’s share of global oil demand rise for a while because of the deceleration of China’s oil demand. However, India’s rising demand may pose problems because of current economic developments due to the demonetization of its currency in the short term. However, such problems may be temporary since India’s oil demand growth looks as if it will continue in the mid-term. The remaining emerging markets are still awaiting cheaper financing to invest and consume more oil.
Oil traders also would like to gauge U.S dollar index routes in 2017 after Trump’s inauguration. During his election campaign, Trump accused the chair of the Fed Reserve board, Janet Yellen, of not being impartial on several occasions and has brought up the issue of the Fed’s independence on decision-making.
With increased oil prices, oil market players should speculate as to whether U.S shale oil production will flourish or if other oil producers’ investments accelerate. The raise in the U.S Baker Hughes rig count shows that there will be some production increase in the first half of 2017, but nonetheless, other oil investors would like to see more stability in the oil market and further price increases.
To sum up, Brent oil prices are still seeking a balance between supply and demand, but at least they are over $53 per barrel for now. Oil market players would like to see prices in the range of $60 per barrel, which they have attempted, if there is some decrease in the U.S dollar index. The range between $53 and $60 can be seen as realistic in the short term.