By Serdar Gürüzümcü
Weekly oil report, from Jan. 9

- The Writer holds an MSc from Creighton University and is a PhD candidate in the Turkish National Police Academy

 Oil prices began 2017 with expectations that prices would see a rising trend through OPEC and non-OPEC’s agreement on an oil cut to find a balance in the market. There is also anticipation that oil demand will uptake with the potential effect that President-elect Trump will have on the U.S economy and the oil market.

Oil markets last week will be reviewed based on the U.S. dollar index, weekly American Petroleum Institute (API) and Energy Information Administration (EIA) crude oil inventories, weekly U.S. Baker Hughes rig count as well as speculations during the week 

Oil prices began the week and the New Year on Tuesday, Jan. 3 since oil markets (Nymex and ICE) were closed for the Bank holiday on Monday. Brent oil prices started the week with a fall to $55.47 due to the increase in the U.S. dollar index and with speculation over the possible Libya oil production boost due to its exemption status in OPEC’s oil curb deal. Later, oil prices regained losses and were $56.46 through a decrease in the U.S. dollar index.

Following such U.S dollar weakness, weekly API and EIA reported an unexpected decline in U.S. oil inventories which resulted in an oil price rise to $56.89. Subsequently, a stronger U.S dollar after the announcement of U.S. unemployment rates as well as the increase in the U.S. Baker Hughes rig count offset this price rise and settled at $57.10 at the end of the week.

Last week, changes to the U.S dollar index and speculation over an upturn in Libya’s oil production were mainly responsible for influencing oil prices. According to the EIA, Libya has the largest proven oil reserves in Africa, but they have had difficulty in producing and exporting oil due to civil war in the country since 2011. However, Libya can quickly recover from lackluster oil production provided that conditions are in place to do so.

Such a fast recovery in Libya’s production can be seen in the period between July 2014 and December 2014. Over this period, production levels reached over 900,000 barrels a day from about 200,000 barrels a day, according to EIA. Despite the decline in oil prices during this period between July 2014 and December 2014, Libya’s escalation in production seems to have short-dated oil production and somewhat impacted almost a 50 percent decline in prices over this period.

Therefore, speculation over a gain in Libya’s oil production or any news on the route of its exports will continue playing a role in the movements of oil prices.

Further deliberation over how OPEC and non OPEC members handle the supply curb deal can also be a game changer in oil pricing. Many oil exporter companies who agreed to cut production declared their oil supply quotas in compliance with the deal. However, one of the biggest challenges to the deal could be in the monitoring of the supply quantities of each country under a Ministerial Monitoring Committee led by Kuwait. This Committee plans to hold its first meeting on Jan. 21-22 and it will be critical for OPEC to clarify the monitoring process to satisfy the oil markets.

On the oil demand side, low inflation rates in developed countries have been one of the biggest challenges to global growth and demand for a while, so the Fed - the U.S. Central Bank, the Bank of Japan and European Central Bank have applied active monetary policies to reach their inflation rate targets. Unfortunately, they have not succeeded in doing so, but they appear to be applying fiscal policies such as low taxes, as proposed by Trump, to achieve their inflation aims. Such a policy looks good for oil demand, however, a strong dollar can still pose a big challenge in oil prices.

Oil prices attempted to reach the $60 per barrel mark, but a strong U. S dollar, realized through Trump’s victory, has not allowed this so far. Furthermore, doubts over the implementation of OPEC and non-OPEC members’ agreement and the rise of the U.S. Baker Hughes rig count remain other significant reasons why prices have not reached this level.

The price range between $53 and $60 for the short term as predicted in our weekly reports has been accurate so far, but on the supply side, OPEC’s Ministerial Monitoring Committee and on the demand side, U.S dollar index with Trump’s inauguration this month could lead to a new price range in the short term. 

10 Jan,2017
ANALYST