Oil prices off the hook?

Looking at the graph, it seems that the bad days are over for oil producers and oil and gas investment worldwide. Average Brent crude oil price in January so far is higher by around 60 percent compared to similar period last year, whereas one can clearly distinguish a rising trend in prices month-on-month in 2016-17.

To commensurate this with oil and gas exploration and production companies around the world, spending has been axed massively in the weak oil price era. However, after a continued investment freeze in the past two years, the recovery in crude oil prices is now likely to trigger the oil companies to ramp up spending in 2017. According to Wood Mackenzie, a global energy consultancy, capital spending by leading global oil and gas E&P companies will increase by around three percent in 2017 versus 2016, ending the declining trend.

Just recently, the uptick in oil price has been solidified by OPECs production cut something that was unthinkable before. Brent crude has been trading at double the 12-year low hit in early 2016 after OPEC and non-OPEC producers agreed in December for a supply cut in a decade. However, where this production cut offers oil producers hope for higher prices in 2017, perhaps one cannot do away with the uncertainty of expectations.

For one, it is important to believe that the production cut alone will not push prices up at least in the near term; there has to be an outlet for inventories too; Globally, inventories must be reduced before higher oil prices can make a long-term stay.

Secondly, compliance is never 100 percent. the global markets are abuzz with the likelihood that OPEC will not fully deliver on its target to cut production.

So, while there are sanguine hopes for better prices in 2017, doubts about the durability of the OPEC cuts, still-over flowing inventories, and the variability of demand and consumption of fossil fuel in times of rising carbon-consumption awareness can keep oil prices in check.