The word ‘cartel’ is synonymous with power. When we turn back the pages of history, cartels of various magnitudes have dominated the pages of history in the global economy. Numerous economies have dominated the global scenario in ways of production and supply. Domestically, cartels in the cardamom business have rocked the industry leading to volatile prices hitting producers and consumers alike. While the scenario on the domestic front in the oil markets has shown a steady picture in recent days, with fewer stories of standing in long queues for a few liters of petrol, the global picture has a different story to tell.
Last year, the global financial markets had been peppered with various turning plots. Amidst the chaos, OPEC members finally made the long-debatable decision to cut supplies. In contemporary times, much of the focus in the oil markets has been on OPEC and its agreed decision to cut production by 4.5-5.0%. The agreement sent the price of oil soaring by 9% in a single session and a further 4% over the ensuing sessions.
While the OPEC decision will remain a footnote in the sands of time, it has resulted in the West Texas Intermediate (WTI) crude oil futures churning the biggest volume in one day ever. However, analysts opine that supply will not only be the most important factor driving prices forward in 2017. Since 2008, the US has joined hands with OPEC nations such as Saudi Arabia as a key swing producer, and with evidence in recent times the energy industry of the US is gearing up to produce more oil.
According to Baker Hughes, an energy services company, the number of active US oil rigs has increased more than 60% since hitting bottom in May 2016. The trend signifies higher US production which could compensate any decline in OPEC production. Latest statistics have proven that US productions have already begun to increase. After declining from 9.59 million barrels per day (bpd) in April 2016 to 8.43 million bpd in July 2016, production has since inclined to reach 8.79 bpd in early December 2016.
The current incline in prices of black gold could be limited by the steadily rising production from USA. Likewise, a further rise in oil prices will stimulate more drilling thereby further increasing production. Hypothetically, if US productions return back to its peak, it would offset 0.9 million of OPEC’s proposed 1.2 million bpd production cut that began in 2017. However, the line has not been drawn on how OPEC would adhere to its production cut. Under the agreements, the ball is in the court of Algeria, Kuwait and Venezuela to monitor the legal aspects. Nations including Saudi Arabia have traditionally kept their side of the promise but other countries like Iraq, whose production is highly decentralised and has more often than not a weak central government, will inevitably face difficulty controlling domestic production. Taking all the factors into consideration, OPEC’s actual production may end up being considerably less than the 1.2 million bpd i.e. 1.3% of the global production.
In 2016, crude oil did rally towards the $55 per barrel mark but failed to surpass it in June and October. However, if crude oil does rally past $55, then a key resistance level will be $60. In the short term, this piece of information would be great news for struggling oil producers, energy stocks and currencies including the Russian rubble and Canadian Dollar. In the longer term, however, it could motivate a huge spike in the US production.
Another major obstacle for energy prices is inventories. The US economy is the only country to publish weekly information on oil inventories from sources like Energy Information Administration and American Petroleum Institute. The data from these sources claim that the market is awash with supply. Oil inventories remain near record high and are still growing on a seasonally-adjusted basis of 7% year-on-year after an astonishing 35% rise in 2015 alone. While a prolongation of the post-OPEC rally seems a possibility, a longer term bull market might be a difficult story to swallow.
With the numerous high-level agreements and meetings, OPEC appears determined to prevent excessive volatility and especially a return to the nine-year low mark of $26.04 per barrel in February 2016. A more stable oil price will boost investment spending in USA, at least from producers who are able to survive with $50 per barrel price of oil.
The oil markets have always conjured up a battle of dominance in the recent times and 2017 will be no different. If 2016 belonged to OPEC and its decision to cut back on the supplies to ‘stabilise the markets’, 2017 could be the turn of the USA with its various policies to strengthen its grip on the global oil markets. Either way, the year could pan out to an exciting finish. Who will dominate the headlines come the end of 2017 is anyone’s guess. For now, let us spread the message!
(The author is associated with Mercantile Exchange Nepal Limited in the capacity of Manager in Research and Development Department. He can be contacted at r&[email protected])