By Niki Malde
With ongoing tensions in Iran and production cuts by OPEC, there has been nothing to stop oil prices from pushing higher. Oil recently touched $64.86, which represents a rise of 8.65% in the last month alone. There is no shortage of opinions as to which way oil will go next, however, several key factors affecting oil prices remain.
OPEC production cut
At OPEC’s meeting on the 30th of November, the organisation announced an extension in production cuts up to the end of 2018. On January 21, 2018, a special meeting of oil producers will be held in Oman that will bring together both OPEC and non-OPEC members. With financial institutions increasing their forecast for Brent prices, the main focus of the meeting will be a smooth relaxation of the ongoing production cut.
Any positive news about higher compliance with the plan might further support oil prices, however, any negative news may put more downward pressure on prices. The surge in US production has already stalled at least temporarily as the icy winter weather in North America has shut down some facilities. However, most analysts still expect US production to break through 10 million BPD soon. The higher the prices go, the higher the initiative for the US shale producers to pump out even more oil. This could lead to an oversupply, which may put the oil rally at risk.
Geopolitical issues
Recent changes in the dynamics of Yemen’s civil conflict—widely seen as a proxy war between rivals Saudi Arabia and Iran—are making it very hard to predict what could happen next in the Middle East. Elsewhere, production is falling fast in Venezuela while a fall in the output of North Sea in December has tightened supplies. Finally, uncertainty over what to expect from the Washington-Tehran confrontation is helping to push up oil.
Meanwhile, a buoyant global economy has bolstered oil demand, meaning that prices could go higher still. OPEC sees demand growing at a brisk 1.5 million barrels per day in 2018. However, high demand from countries like China and the United States is still essential to keep prices from dropping. With these nations on the path to increasing their internal refining capacity, a downturn might be expected.
Prices are expected to remain above $60 per barrel and if the global economic recovery remains upbeat prices may reach $75. Sustained higher oil prices would mean a significant difference in the EM foreign exchange, with upside risks to EM rates. The impact on trade positions may create challenges to net importers of oil while benefiting net exporters. Other risks to be considered are potentially higher rates, a negative impact on growth, and implications for EM credit.
The price of crude oil
The price of crude has risen by 54% since mid-2017 and is currently hovering at $64 a barrel. Only major negative news would be likely to force crude to break the $70 level. If the price of oil breaks the $70 level and is sustained there, it may well touch 61.8% of the Fibonacci retracement level. However, only a war in the Middle East—possibly arising from tensions between the Iranian and Saudi Arabian—would be likely to send the price of crude up this far.
Higher oil prices are a real danger to the market share of OPEC members because it could provoke an aggressive response from US shale drillers. Nevertheless, prices are expected to be sustained above $59-60 per barrel, and if the global economic recovery remains upbeat, prices are expected to reach $75.
Featured Image Source: Flickr
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