There is never a dull moment at the international oil market. The black gold, at the New Year saw its highest opening for both Brent and WTI in three years. Oil at $66 per barrel is nowhere near the highs of June 2014 ($107/bb). But it is also far from the lows of $26/bbl of February 2016. It has in fact gained more than a third in less than six months. Where to from here is the next question, and the answer, as often is the case with oil is little known.
The bulls are having an extended, and somewhat, uninterrupted run. And there are multiple reasons for the strong recovery, most critical of which is the surprisingly strong compliance to production cuts from all Opec members and Russia. The rebound in global demand, especially that from China, and the slowdown in global stockpile, has also contributed their fair share.
The tensions in Iran and the other troubled Middle East countries have time and again provided enough fuel for the bulls to keep running. The Venezuelan economic troubles have also impacted the oil industry to a great degree, evident from the huge fall in oil output. What once used to be 3 million barrels a day a decade ago has now come down tanking to 1.8 million barrels a day of oil output from Venezuela? And things are all set to go worse with the South American giant expected to lose another 0.3 million barrels a day sooner than later.
And that is what has prompted such investment houses to have called for oil at$100/bbl by the end of 2018. But that looks on overly simplistic viewpoint, as the USA’s resilient shale production cannot be discounted, not especially, when prices have improved. The investment details coming from the US suggests the production will likely increase in 2018. It may still not make up for the Opec production cuts, but will be incentive enough for shale producers and Canada to ramp up production and add more rigs.
The rig count in the US has so far seen a modest growth, as most producers are biding time for oil price to settle in a broad range of ideally $50-60/bbl. This is the range which seems most likely to be agreed upon by both Opec and non-Opec producers, as it are the closes to any semblance of rebalancing. Little surprise that Moody’s has called for oil prices to not exceed $60/bbl, and not go under $40/bbl for much of 2018. Pakistan would dearly want the stars to align this way, as a worsening rupee with high imports, have already caused headaches at home.
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