By Serdar Gürüzümcü
Weekly oil report from May 15

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

Brent oil prices gained support from expectations of a six-month extension of OPEC non-OPEC countries in output cuts, the more-than-expected declines in U.S. oil inventories, a sharp decrease in the U.S. dollar index due to inflation data which was lower than expected, and with the disappointment of Trump’s unrealized tax cuts and infrastructure plans. However, the upsurge in U.S. oil production since early 2017 and the production rise in countries outside the OPEC and non-OPEC oil cut agreement is still curtailing gains necessitating the extension of the existing output cuts or even further 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 May 8 with a rise to $49.34 through the news that OPEC and non-OPEC would agree on extending the existing oil cut deal on May 25 even though a rise was seen in both in the U.S. dollar index and in the U.S. Baker Hughes rig count from the previous week. However, oil prices dropped down to $48.73 due to an increase in the U.S. dollar index on Tuesday.

According to the weekly American Petroleum Institute (API) report last Tuesday, a decrease was seen in U.S. oil inventories of 5.789 million barrels compared to 4.158 million barrels from the previous week and the lowering of U.S. oil inventories of 5.247 million barrels compared to 0.930 million barrels from the previous week as reported in the weekly EIA report, resulted in a rebound in prices to $50.22. This was despite the strong U.S. dollar on Wednesday and rising U.S. oil production to 9.314 million barrels per day, as per the U.S.’ weekly EIA field production of crude oil.

Oil prices continued up to $50.77 on Thursday through the expectations of further declines in high stockpiles in U.S. oil inventories upcoming weeks and settled at $50.84 at the end of the week supported by the decrease in the U.S. dollar index despite an eleven-rig count rise in the weekly U.S. Baker Hughes data.   

In brief, the declines in U.S oil inventories helped revive oil prices and the sharp decline in the U.S. dollar index on Friday sustained Brent oil prices over $50. 

As previously reported, the possibility of a six-month extension in OPEC and non-OPEC’s oil cut deal was insufficient to stabilize Brent prices over the $50 margin towards $60. OPEC led by Saudi Arabia and non-OPEC producers led by Russia are leading the way for an agreement on a nine-month extension of the output agreement which they hope other producers, even those outside the OPEC and non-OPEC members will also agree to. However, even if an agreement is reached for an output cut extension, greater volumes of oil cuts would be needed for the oil price to rebound to over $60. The upcoming annual OPEC meeting on May 25 will see if this can be realized. Another available option for OPEC and non-OPEC producers is to cut oil exports rather than oil production.   

The recent relatively weak U.S. dollar index continues to support the upward trend in oil prices along with declines in U.S. oil inventories. The U.S. dollar, which strengthened since Trump’s election win, fell on the lower-than-expected inflation rate and on uncertainty with Trump’s projects. Such declines in the index are helping OPEC and non-OPEC’s producers in this challenging environment for now, but the U.S. Fed’s projections for two more interest rate hikes for 2017 are still valid.

At the end of last week, Brent oil made it over the $50 margin primarily through declines in U.S. stockpiles, relatively weak U.S dollar index and on expectations of further declines at the end of last week. Although downside risks still remain with uncertainties over the output cut agreement, prices could reach over $53 this week, if further declines are seen in U.S. oil inventories or in the dollar weakens. Failing that, if prices drop to below $50, OPEC and non-OPEC could be spurred on to agree on an output cut extension and on greater production cuts. ​

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

17 May,2017
ANALYST