- The Writer holds an MSc from Creighton University and is a PhD candidate in the Turkish National Police Academy
This year, which was very volatile for both financial and oil markets, is coming to an end. Oil prices saw $27 at the beginning of 2016, the lowest over the past 12 years, due to sanctions against Iran being lifted and the Federal Reserve’s interest rate hike projection for the year. Russia called on OPEC members for an oil production cut together to act against the plunging prices in February.
There were many speculations about the OPEC oil production cut or freeze throughout 2016. Towards the end of the year, OPEC and non-OPEC members reached a consensus to curb output by a total of 1.8 milllion barrels per day for six months starting from January 1st, 2017.
Fed interest rate hike expectations also had significant influences on oil prices. Prices experienced sharp falls or rises due to the changes of the U.S dollar index before and after the Federal Open Market Committee (FOMC) meetings in 2016.
Some political events such as Brexit and the U.S presidential election were the other developments impacting on oil prices.
The oil markets last week will be reviewed based on the FOMC meeting, 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 slight fall to $54.92 due to the U.S. Baker Hughes rig count rise from the previous week. However, they rose to $55.35 with positive expectations from the OPEC and non-OPEC oil cut agreement. Subsequently, despite the API report pointing out to a decline in U.S oil inventories, the rise indicated in the EIA report caused a drop in prices to $54.46. Speculations over an oil production rise through the completion of the new oil pipeline in Libya also played a role in the fall.
Later, in spite of the increase in the EIA report, the weak and steady U.S dollar index as well as a belief that parties will obey the oil output curb deal, led to the rise in prices in the rest of the week. Also due to the quieter financial markets on Christmas Eve, oil prices finished the week at $55.16, having moved in a narrow range within the week.
What awaits oil prices in 2017?
Oil markets will mostly focus on the implementation of the OPEC and non-OPEC production cut agreement in 2017. Some parties involved in the agreement such as Iran and Kazakhistan would like to opt out and inrease their production. But it is hard to raise output in a very short time as development of oil fields can need some time.
U.S oil production will be another important indicator oil markets will keep an eye on due to the long-term increase experienced on U.S Baker Hughes rig counts since June 2016, with the exception of one or two weeks.
US President-elect Donald Trump does not seem to be environmentally sensitive in terms of oil exploration and production as compared to the outgoing President Barack Obama, who has just banned oil drilling in some areas in the US. Therefore, Trump can let oil producers explore and produce more through new legislations regardless of environmental sensitivities.
On the demand side, oil markets may experience a rise through the expansionary fiscal policy Trump promised during his election campaign, However, Trump will need some time to start implementing his economic policy after taking office in Jaunary 20, 2017.
Oil markets are also expected to be indexed to the interest rate policy the Fed will follow in the coming period.
In short: Price can stay in the range of $53 and $60 in the short term. However, the uncertainties mentioned above are expected to influence prices particularly in the first quarter of 2017. It is expected that price volatility can be high in this quarter. Oil investors will more likely be able to make long-term plans after the first quarter of 2017.