By Harsh Vardhan Singh
Heading into 2018 we expected that oil would cross $70 per barrel, but by the second month of the year, this does not seem to be happening. Oil continues to decline day by day and now stands at $68. Meanwhile, according to API, US crude oil inventories increased 6.8 million barrels to 418.4 million by January 26, 2018. This jump in inventories ended a 10-week decline and interrupted the oil price rally. According to EIA, Brent crude and WTI closed on February 2 at $68.23 per barrel (down 2%) and $65.14 per barrel (down 2%) respectively.
The end of the crude oil rally
On the other hand, an increase in US Rig counts and growth in crude oil production are both putting huge pressure on oil prices. According to EIA, US crude oil production increased by 41,000 bbl/day to 9,919,000 bbl/day. With increased production of unconventional oil, the US is capturing the oil market at the expense of the producers of conventional oil. According to Baker Hughes, the rig count increased by 6 rigs to stand at 765 rigs for the week ending February 2, 2018.
Despite all these facts, the bigger investment banks hold very optimistic views on the oil market and oil prices. Goldman Sachs is in front and predicts that the oil market has likely balanced and that we will see Brent crude at $82.50/barrel within six months. Goldman sees the price of Brent reaching $75/barrel within three months. The expectation of increasing global oil demand emboldens JP Morgan to raise its forecast, predicting that Brent prices will average $70 this year, with a peak of $78/barrel at some point in the first half of the year.
A threat to OPEC
US unconventional shale oil producers have started to increase their oil output and rig counts, which is a big worry for OPEC members. OPEC countries will soon start to question their commitment to the current production cut. The important question for OPEC and non-OPEC producersespecially Saudi Arabiais whether they can continue their oil production cut or will abandon it.
In 2014, Saudi Arabia had a leading market share in oil against producers of shale. When OPEC started rebalancing the market by introducing a production cut, the oil kingdom refused to cut its production, which allowed prices to collapse to $30. However, Saudi Arabia has changed its oil policy since then. They now support trying to raise oil prices and have been successful in raising the price from $29 to $65/bbl. But in rebalancing the market, the country’s put its market-share at stake and now risks losing its premier position in the industry.
Predictions for the future
Looking at the current situation, traditional oil producers who are in need of higher oil revenues are driving oil prices up by cutting their oil output, while unconventional oil producers continue to break new oil production records and steal market share. Sooner than anyone predicts, this may lead to another collapse in the oil market.
Nevertheless, the market is bullish and many expect it to remain so. But the expected increase in US crude inventories over the next few months complicates the situation. And making an assumption that oil will surpass $80 in a six-month period is quite a stretch by the forecasters unless they know something that we do not. So all we can do is just to hope for the best and pray that the Goldman Sachs forecast comes true and oil will be selling at $80 in six month’s time.
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