By Serdar Gürüzümcü
Weekly oil report from April 17

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

The Brent oil price rally started with the possibility of prolonging the OPEC and non-OPEC oil cut agreement along with the deal’s high conformity level which cumulated in their meeting in Kuwait on March 26 and prices reached up to $56.64 last week from $50.03 on March 27.  However, the concerns of a U.S. shale oil boom in response to the continual weekly rise in the U.S. Baker Hughes rig counts over the past year as well as a strong U.S. dollar offset this recovery. Nonetheless, for further price increases, a price margin over $55 would be crucial.

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, and the weekly U.S. Baker Hughes rig count.

Brent oil began the week beginning April 10 with a rise to $55.98 through optimism over the extension in the OPEC and non-OPEC deal and the decrease in the U.S. dollar index despite the rise in the U.S. Baker Hughes rig count from the previous week. Thereafter, oil prices surged to $56.23 through the decrease in U.S. oil inventories of 1,300 million barrels compared to 1,834 million barrels from the previous week as reported in the weekly API report and with the further decrease in the U.S. dollar index.

However, oil prices declined to $55.86 on Wednesday due to the increase in the U.S. dollar index despite the decrease in U.S. oil inventories of 2,166 million barrels compared to the increase of 1,566 million barrels from the previous week as reported in the weekly EIA report.

Oil prices, nonetheless, surged to and settled at $55.89 at the end of the week through the decrease in the U.S. dollar index despite an 11 rig count rise in the weekly U.S. Baker Hughes data.

During the week, both oil prices and the U.S. dollar index diverged and consequently, the strong U.S. dollar continued to stem an oil price rise. But significant events that affect the oil supply/demand balance like the OPEC and non-OPEC oil cut deal or even news about the possibility of prolonging such a deal can break the negative correlation between oil prices and the U.S. dollar as witnessed in the sharp fluctuations between $50 and $55 over the past month.

Since there is mainly a negative correlation between the U.S. dollar and oil prices, changes in the U.S dollar index are becoming more significant for oil price trends. The Fed’s Chair Janet Yellen claimed last week in her speech at Michigan University that the U.S.’ unemployment and inflation rates were on target, so the FED will continue its gradual interest rate hikes in the upcoming Federal Open Market Committee (FOMC) meetings. Therefore, a strong U.S. dollar would continue to stem oil price increases until the FED stops its interest rate hikes.

President Donald Trump in his interview in the Wall Street Journal last week stated his fondness for the Fed’s low-interest rate policy, but historically, the Fed had raised interest rates three times over the past two years and plans to have two more rate hikes this year. Therefore, it is difficult to determine the route the U.S. dollar will take this year.

The latest EIA reports show expectations of production increases. However, projected volumes do not correlate with production increases forecasts from rising rig counts. Therefore, the OPEC and non-OPEC oil cut could continue to weigh in on oil price increases in the next few days. The OPEC and non-OPEC Joint Ministerial Monitoring Committee conformity report, which is expected to be released this weekend, would have a significant impact on oil prices next week. The conformity level as per the report is expected to be higher than the previous 94 percent since Russia’s output is expected to be more in line with its pledged amount.

Although a strong U.S. dollar and concerns over a U.S. shale oil boom reined in further price increases, the OPEC and non-OPEC oil cut high conformity level so far and the possibility of extending the production cut deal helped Brent reach prices over $55. Therefore, if oil prices remain above $55 per barrel this week, through possible declines in U.S. oil inventories in both the weekly API and EIA reports, prices could reach as high as $57.

   - Opinions expressed in this piece are the author’s own and do not necessarily reflect Anadolu Agency's editorial policy. 

18 Apr,2017
ANALYST