By Serdar Gürüzümcü
Weekly oil report from May 8

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

 

OPEC led by Saudi Arabia and non-OPEC countries led by Russia took the necessary action with the oil cut agreement at the end of 2016 to stabilize oil prices over $50 per barrel with the aim of reaching over $60. These efforts worked until the upsurge in U.S. oil production since early 2017. In the meantime, the U.S. dollar gained strength from Trump’s inauguration and with two Fed interest rate hikes. Now, the oil market, which has seen sharp price declines, is now urging for an extension of the existing oil cut and for greater oil cuts.  

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 EIA field production of crude oil in the U.S. and the weekly U.S. Baker Hughes rig count.

Brent oil began the week beginning April 24 with a slight decline to $51.52 due to the rise both in the U.S. dollar index and in the U.S. Baker Hughes rig count from the previous week. Oil prices continued to drop down to $50.46 due to a production rise from Libya’s national oil company despite a decline in the U.S. dollar index and a decrease in U.S. oil inventories of 4.158 million barrels compared to the increase of 0.897 million barrels from the previous week as reported in the weekly API report on Tuesday.

However, oil prices rebounded to $50.79 through the lowering of U.S. oil inventories of 0.930 million barrels compared to 3.641 million barrels from the previous week as reported in the weekly EIA report, although an increase was seen in the U.S. dollar index on Wednesday.

Oil prices sharply declined to $48.38 on Thursday due to uncertainty on the details of the possible OPEC and non-OPEC oil cut extension and with high stockpiles in U.S oil inventories. In addition, the rising U.S. oil production to 9.293 million barrels per day, according to EIA, and the possibility of a FED interest rate rise at its Federal Open Market Committee meeting (FOMC) in June also contributed to the plummet in prices.

Regardless of the increase in the U.S. dollar index and a six rig count rise in the weekly U.S. Baker Hughes data, prices regained some losses and settled at $49.10 at the end of the week through news that OPEC and non-OPEC would agree on prolonging the existing oil cut deal on May 25.

In brief, the U.S. dollar index and oil prices moved in positive correlation last week, however, price volatility remained high for the second consecutive week.

Last week the possibility of a six-month extension on the oil cut deal of OPEC and non-OPEC producers were insufficient to push Brent over $50, indicating that a bigger oil cut or an extension beyond six months is needed to further boost prices. However, with the prospect that the U.S. and Canada will fill the gap by escalating their production to replace the OPEC and non-OPEC production cut, a tough meeting is assured at their upcoming meeting on May 25. Nonetheless, a larger oil cut for a longer period, particularly from OPEC, could be on the cards at the meeting to keep prices over $50 and reach $60.

The U.S. dollar index has helped stem deeper declines. The index began to rise on the results of the French presidential elections last weekend and with the FOMC meeting last Wednesday. This upturn could impact the extent of the output cut for OPEC and non-OPEC’s producers since increases in the U.S. dollar index could continue up until the FOMC meeting in June.

Last week, Brent oil prices failed to stay over $50 per barrel. Consequently, downside risks are becoming greater with the rising U.S dollar index and uncertainties over the output cut agreement. If prices continue to stay below $50 this week, then further decreases down to $45 could be seen to force OPEC and non-OPEC to extend the deal for a longer period and for greater quantities.

 

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

 

09 May,2017
ANALYST