Big changes are coming to the oil market - December 18, 2016

Big changes are coming to the oil market

There seems to be a new competition on the oil market: which OPEC country can cut back its production the most. OPEC members met on the 30th November and they reached an agreement but just days later Saudi Arabia announced: they’ll hold themselves back even more. Meanwhile, there are countries like the U.S. which would probably rev up their production, so the market may balance itself.

The desire for an OPEC agreement was not unknown: we wrote about it in October, believing that this can hike oil prices, but there were lots of uncertainties. OPEC members tried to agree upon cutbacks before, but usually nothing happened. Now, they managed to reach an agreement.

What’s more, on 10th December other countries decided on holding back themselves too. Namely: Russia, Mexico, Oman, Azerbaijan and Kazakhstan will cut oil output. OPEC members cut back their production with 1166 thousand barrels, while the other mentioned states with 558 thousand barrels.

This obviously made the Brent prices go up: since November it rose with a whopping 15%. In our analysis in October we wrote: “If they do reach an agreement that would easily raise the prices to $60-70”. Now we see prices around $56, and they may go even higher.

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But there are other important parties on the market, too. The U.S. has huge amounts of shale oil and for them any price above $50 is good to restart production. President-elect Donald Trump is also a great supporter of fossil fuels, and in his campaign, he promised to rev up oil usage and production. He already appointed Rex W. Tillerson, CEO of Exxon Mobil, the world’s biggest oil company, as his secretary of state. This one country can have a great effect on the oil market, not to mention others like Canada, China and Norway which won’t slow down their production.

As we can see, some producers are cutting back production, but other big ones are going in the other direction, and altogether this may bring a balance on the market with a price around $60 per barrel, but on the short-term prices may hike to $70-75. Meanwhile, the rise of prices may have very important effects globally. They can help oil companies to return to their long forgotten investments for example, which is totalling up to $500 billion since the problems of the 2008 financial crisis. This may give a huge boost to the global GDP. Rising oil prices on the other hand may hold back consumption as people will have to spend more on petrol, therefore less on other goods. The rise of oil may also give a push to inflation which has just returned to global economy.

Will prices stay high for a longer period? Hard to say at the moment. What’s sure is that the OPEC agreement was an important step towards higher oil prices, but the path is long and hard, and we don’t know how long these countries will stick to the new production numbers. What’s sure though, is that a price between $60-70 would be optimal for both the oil industry and consumers.

Disclaimer: This analysis is for general information and is not a recommendation to sell or buy any instrument. Since every investment holds some risk, our main business policy is based on diversification to minimize threats and maximize profits. Innovative Securities’ Profit Max has a diversified portfolio, which contains liquid instruments. This way, our clients can maintain liquidity, while achieving high returns on their investments.