by Umar Farooq
Oil prices tumbled on Friday, on track for the biggest weekly drop in a month on renewed concerns that increasing U.S. production and high inventories will thwart OPEC’s attempts to reduce the global crude glut. U.S. crude futures fell below $50 a barrel for the first time in two weeks, with volumes picking up in an active session that by late morning already showed more than 400,000 front-month contracts changing hands.
It’s inexplicable that perceptions of market experts are so enormously divergent with regard to the Oil price. Predictions range from a 20-percent reduction (to roughly $42 a barrel) to an exuberant 100-percent increase ($100) by next year. Oil prices have an uneven impact on economies — especially economies in desperate need of fuel-injection themselves.
According to the Energy Information Agency, global oil production is 98.3 million barrels per day (MMPD), and consumption is a bit less at 98.1 MMPD. At that rate, the current supply glut will continue and prices should stay within a relatively tight range. That is, however, if all other things are static. Which of course do not remain static.
Goldman is reiterating its confidence in oil at a time when investors are fretting over whether U.S. production, which has climbed to the highest since August 2015, will undermine curbs by the Organization of Petroleum Exporting Countries and its allies. After posting three straight weekly gains on expectations OPEC will extend its supply cuts, crude is now set for a drop this week following a decline of more than 3.5 percent on Wednesday. “We view technicals rather than fundamentals as the driver of this move lower,” analysts including Damien Courvalin and Jeffrey Currie wrote in the report. The U.S. inventory data released on Wednesday was “in line with expectations,” they said, reiterating the bank’s sequentially higher second-quarter Brent price forecast of $59 a barrel.
OPEC, Russia and other producers agreed in December to a six-month deal to cut 1.8 million barrels from the world market, helping boost oil prices to the mid-$50s. But oil prices have waned whenever supply worries re-emerge. OPEC technical staff this month is expected to make a recommendation on whether to extend the cuts, and OPEC’s monitoring committee meets the day before OPEC’s May 25 meeting.
Here are the few major reasons that explain the fluctuating oil prices.
Production cuts: The Organization of the Petroleum Exporting (OPEC) and several non-OPEC nations, notably Russia, have imposed production cuts since January, reducing output by roughly 1.8 MMPD. That effort, which put supply and demand in more of an equilibrium, raised prices by a few dollars (interestingly, before actual implementation).
Geopolitical concerns: Considerable geopolitics always plays a role in oil pricing, especially when they involve conflicts— like those in the Gulf Region, where roughly 60 percent of global oil is produced. We’ve witnessed it time and again.
Domestic policy & politics concerns: In addition to geopolitical circumstances, there is great uncertainty about President Trump’s domestic economic agenda. While a litany of executive orders indicate an intent to roll back environmental and energy law and regulations, there’s a lack of confidence in the shelf life and reliability of many campaign policy statements.
In short, understanding the fact that we are living in troubled times helps explain the dramatic discrepancies in price projections for Oil. In a world of provocations and escalating tensions, inequable price projections may well reflect the great extent of possibilities driven by uncertainty.
by Umar Farooq