by Victor Mozambigue
Crude-oil, a commodity making billions of dollars became a losing game in 2014. With lowering oil prices, it was likely that oil will never be ‘black gold’ again. The prices reached sub-$30 per barrel level and the analysts were concerned about the effects it could have on the OPEC economies. 2 years and billions of dollars in losses later, the OPEC has finally woken up to the falling prices and has now made 1.8 million barrels of daily cuts in oil production along with 13 other countries. The prices of crude oil has risen to about $50 per barrel but has failed to break into the $60.
What could possibly happen to crude oil prices?
While there was an initial surge in the prices of crude oil, it has been unable to get out of $50-$55 range for now. Even the 1-year outlook for the crude oil prices suggest a mild increase with a disappointing projection of barely $61.This clearly means that crude oil may not go back to where it was in 2014. Focusing strictly on current oil price situations, it is expected that oil will reach only $58 per barrel by 2018. This means a serious problem for the oil producing nations as they may not have expected such a setback on the prices after the oil production cuts.
— Newsco Inc. (@newscoinc) February 23, 2017
Per the US Energy Information Administration, the prices of oil will not cross $55 per barrel in 2017 and will only go up to $57 per barrel in 2018. The US oil production is also expected to go to 9.5 billion barrels per day by 2018. Such an increase in production in the US can lead to a further drop in prices as crude oil will remain in abundant supply. It is to be noted that the Vienna agreement between OPEC and 13 other oil producing nations will end in June 2017.
Even though OPEC countries have shown 90% compliance in following the agreement, the other participating countries may not make similar sanctions which will keep the prices steady. If these countries produce more oil than they have promised, then an oversupply in crude oil will lead to a slump in prices like 2014.
Hedge fund managers think ‘long’
The hedge fund managers around the world are certain that the rally in the oil prices will continue. Hedge funds have long position whose estimated value is expected to be around $49 billion. This is the highest notional value of crude oil since 2014. The funds are holding long positions in oil at both WTI and Brent. In fact, for every short position, there are more than 9.5 long positions for crude oil. Clearly, the hedge fund managers expect a bullish trend in oil. As prices of oil remain stable for this quarter, the hedge fund managers can now bet longer with the same amount of money.
The crude oil prices could experience a drop after Vienna agreement ends in the middle of the year or if countries other than the OPEC wish to change their production. However, the chances of the agreement continuing through the year and letting prices stabilize are also high. It is only a matter of time till we know.