- The Writer holds an MSc from Creighton University and is a PHD candidate in the Turkish National Police Academy
Oil prices were on track to reach $60 after the oil cut agreement of OPEC and non-OPEC countries and through relatively weak U.S. dollar index after Trump’s inauguration, but a strong U.S. dollar so far has not allowed oil prices to reach $60 since the index is now overvalued and higher than before Trump’s election win. Furthermore, anticipation on an increase in U.S. oil production through the rising U.S. Baker Hughes rig count for almost nine straight months seemed to be another obstacle for oil prices in the region of $60.
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 U.S. Baker Hughes rig count as well as speculations during the week.
Brent oil started the week with a slight drop to $55.23 due to the rise in the U.S. Baker Hughes rig count from the previous week and an increase in the U.S. dollar index. However, it surged to $55.70 through a sharp decline in the U.S. dollar index as soon as Trump’s trade advisor stated the euro is less valuable than the U.S. dollar, insinuating inequality in U.S.-EU trade.
Following this statement, the U.S. Federal Reserve Bank (FED) also supported current U.S. dollar index weakness with dovish statements, and the oil price continued its surge to $56.80 despite rises in U.S. oil inventories in the weekly American Petroleum Institute (API) and Energy Information Administration (EIA) reports.
However, the increase in the U.S. dollar index with strong employment data halted the oil price rise to $56.55 and it settled at $56.81 with a slight increase at the end of week in spite of the rise in U.S. Baker Hughes oil rig count.
In brief, fluctuations on the U.S. dollar index last week had a very significant impact on oil prices rather than oil supply and demand dynamics or on any speculation.
Trump’s weak U.S. dollar aim is becoming clearer day-by-day. He and his trade advisor, in their first opportunity to officially share their opinions, emphasized losses in the U.S. economy due to a strong U.S. dollar. However, FED as an independent institution is in charge of determining U.S. monetary policy and has some interest rate hike projections for 2017. According to FED’s 2017 projection, three interest rate hikes during the year are anticipated, which means the U.S. dollar would be stronger. In light of Trump and the FED’s divergent approaches to the U.S. dollar index, oil prices are expected to be very volatile during the year.
Furthermore, oil producers are very optimistic for higher oil prices with Trump’s statements on his support for the oil industry. For example, Saudi Arabia Energy Minister Khalid al-Falih in his interview on BBC said he is glad that Trump is likely to set his energy policy on fossil energy resources.
The oil markets’ optimism over its compliance with the oil cut agreement of OPEC and non-OPEC oil is on the rise as the relevant countries declare their oil cut amounts in accordance with the agreement. On the other hand, in January’s Short-Term Energy Outlook, the Energy Information Administration (EIA) predicts an increase in U.S. crude oil production from around 8.9 million barrels per day in 2016 to around 9.3 million barrels per day in 2018. This shows that the volumes of global oil supply can be balanced through OPEC and non-OPEC’s oil cut or if U.S. oil production rises. Therefore, weak oil demand is more crucial for oil supply and demand balance, and consequently for prices.
Considering all developments above, fluctuations in the U.S. dollar index seem to be pivotal for the setting of oil prices. Therefore, an oil price range for Brent oil between $53 and $60 will be still possible in the short term, but a much weaker U.S. dollar index is needed for prices at around $60 per barrel.
- Opinions expressed in this piece are the author’s own and do not necessarily reflect Anadolu Agency's editorial policy