Making Sense of the Oil Markets

by Darwin on June 18, 2017

The Organization of Petroleum Exporting Countries (OPEC) has surprised markets with increased production levels in May. According to official reports, the total production of oil increased by 336,100 BPD last month, for a total of 32.1 million barrels in May. This news is surprising, given that OPEC has been desperate to cut production of crude oil in an effort to raise the price. By limiting production, demand will have an opportunity to catch up with supply provided that OPEC member countries stick to the production cuts. Unfortunately, several OPEC nations, including Libya and Iraq have increased output is contravention of the recent agreements. Markets have been relatively unsettled of late with a huge selloff in tech stocks, a rise in bank stocks, and renewed interest in cryptocurrency like Ethereum. Regardless, the oil price remains vital to countries seeking to achieve their inflation targets and its performance is key to stock market stability.

Nigeria Set to Add 200,000 BPD to OPEC Output

Nigeria is also gearing up to increase crude oil production. OPEC’s crude oil price is comprised of 13 different types of crude oil, the average price of which was $45.78 per barrel as at Thursday, 8 June 2017. The 13 types of crude oil include Arab Light, Murban, Merey, Bonny Light, Es Sider, Qatar Marine, Kuwait Export, Basra Light, Iran Heavy, Rabi Light, Saharan Blend, Oriente, and Girassol. Combined, these oil variants make up the OPEC production quota. The oil price has been driven lower by increased speculation and excess supply. At the end of May, crude oil was trading at $50 per barrel, but the current price (June 13, 2017) for WTI crude oil is $45.86 per barrel, and the price of Brent crude oil is $48.13 per barrel.


A leading  Saxon Trade analyst, Montgomery Cornish believes that everything hinges on outlier OPEC countries, ‘With Nigeria expected to open the spigot at forcados, oil production is going to increase. This facility has a 200,000 barrel per day production capacity, and this will dramatically increase OPEC’s oil output and suppress prices further. When OPEC initially considered production cuts, countries like Libya and Nigeria were not factored into the equation, owing to the uncertainty of their production capacity. Now, Nigeria is back online and this will impact global crude oil production in a big way.’ Various OPEC members are also concerned about President Trump’s recent decision to abandon the Paris Accord, fearing that the US will boost output of WTI crude oil and cause further damage to the oil price.

Oil Prices Hover near 52-Week Lows

Recent GDP trends indicate that global growth will continue at around 3.3% for the current year, although US growth remains subdued. For Q2 2017 and beyond (the summer months) the US economy is expected to heat up and spending is likely to increase. The economies with the most bullish prospects for GDP growth include India at 7%, China at 6.5% and the US at 2.2%. Oil demand in 2017 is forecast to grow at 1.27 million barrels per day, with total demand at 96.38 million barrels per day. Brent crude oil has a 52-week trading range of $46.47 per barrel on the low end and $60.21 per barrel on the high-end. WTI crude oil on the other hand has a 52-week range of $44.13 on the low end and $58.15 on the high-end.

While stockpiles of US crude oil are falling, news that OPEC is about to ramp up production has dampened expectations of a price rise. The recent rise in OPEC production is its sharpest in 6 months. Recall that neither Nigeria nor Libya were party to the production cuts cited by OPEC recently. Crude oil inventories in the United States declined by 2.25 MPD for the week ending June 9, 2017. Falling stockpiles of US crude oil are typically perceived as a positive for prices, but not with increasing output from OPEC member nations. The ongoing tug-of-war between OPEC and WTI crude oil producers has kept prices suppressed for quite some time. Oil inventory levels remain high, and this will prevent prices from rising much beyond $50 per barrel. WTI crude oil futures for delivery in July are trading at $45.86 per barrel on the Nymex, while Brent crude oil on the ICE also traded lower at $48.12 per barrel for August delivery.

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