2017 PREDICTION IN THE ENERGY MARKET

Oil prices continued to slowly edge higher since the Vienna Conference one month ago. Investors have clearly anticipated that major producers will follow through with the production cut and this has created a space for optimism. Many US energy stocks have risen in the last quarter of 2016 by 25% and higher. We should see next year a global supply reduction by about 2%.
Hopes for the deal have pushed the prices higher and we recently hit $54.06 a barrel on the New York Mercantile Exchange. Brent crude, the global oil benchmark, gained 13 cents, or 0.23%, to $56.22 a barrel on London’s ICE Futures exchange.
The concept of a balancing act will continue into the next few quarters and we will see a new average reference emerges in the months to come. All of us remember the mid $30 of last year with a barrel at $35 in December 2015 and touching $27 in January 2016, this year we are at almost $55 and there is a willingness by producers to keep the price high.

OPEC members and other major Non-OPEC producers will respect the cuts. Venezuela on Tuesday announced that it was implementing the production cut outlined in the OPEC agreement. And the first meeting of a new monitoring committee created to oversee the cuts has been proposed for Jan. 13 was reported by Reuters

There is still a degree of skepticism but clearly, we are in a “Bullish” mood and combined with the excitement of the inauguration of a new President, business oriented and pro-energy, the market will continue to roar bullish for the foreseeable future. $65 we are coming….
However, as we have been repeating constantly the challenge is that U.S. oil production is climbing in parallel to the price of the barrel and it slows down the price increase as supply overflows demand. According to EIA US production climbed from 8.43 million barrels a day in late July to 8.79 million barrels a day last week.

The lesson to learn from 2016 however is that free market can be painful. After a two-year experiment with free markets, the pain of low oil prices forced the world’s biggest producers to join forces in 2016 and find a solution. OPEC and NON-OPEC producers had to agree and reach an agreement in spite of major cultural, political and economic differences.

OPEC led by Saudi Arabia and non-member countries, primarily Russia, agreed after months of discussion and invisible diplomacy to cut production for the first time since the global financial crisis. 2016 was the year of resurgence for OPEC.

OPEC returned to the world stage and geopolitics in oil market policymaking. It did not happen easily and we remember vividly the opposition, face off and other insults the various members exchanged but after almost one year of diplomacy the Vienna agreement came and with it the almost instant 25% reward from a $40 a barrel we went to $53 in 3 weeks.

Now OPEC and Non-OPEC must deal with the new comers starting with Shale Oil. Shale producers may have a short window to take advantage of higher prices. OPEC and other major producers have pledged to cut output only for six months, and the group has a history of exceeding production quotas.

So, 2017 will be the year of “balancing act” and all participants need to understand the limits to this balance.

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