What’s happening to “OIL”? Geopolitical tensions, US Shale Oil and OPEC’s Production Cuts

October 20, 2017

Summary: The breakdown and expectation of Oil market in 2017.

What’s happening to “OIL”? Geopolitical tensions, US Shale Oil and OPEC’s Production Cuts

Oil has been in the spotlight over the past few weeks, not to say since the beginning of 2017, where the black gold struck a staggering $55.72 per barrel.

The geopolitical crisis in Middle East, a new Crown Prince, the unstoppable increase in U.S shale and drilling activity and production led investors to bet against crude, taking the oil price nearly 20% lower since January; the largest Q1 to Q2 decline in 20 years.

So, here’s what’s been happening with oil prices and oil ended hitting a 10-month low last week, where over 560,000 contract changed hands:

Geopolitical tensions

Saudi’s diplomatic war with Qatar on accusations of backing ISIS and a new crown prince named Mohammad bin Salman, King’s Salman elderly son, are the latest geopolitical risks that appearing on the oil market.

Despite the fact that the new prince is unlikely to make any changes to the Oil production policy directly, a more aggressive foreign policy could direct a political risk premium back in the oil price.

Investors seemed to have increased their bullish bets on Saudi’s royal reshuffle on King’s stance against Iran and Qatar, two of the world’s large producers, with the latter being in the spotlight for financing ISIS; Qatar is estimated production at 620,000 barrels per day.

However, investors cut their net longs loose as new crown prince is on a mission to end oil dependence and turn to the global energy markets.

In fact, the prince is looking to sell a large stake in the national selling company, and for this, he will need the oil market to rebalance to get a good price, and hence uncertainty over bulls vs. bears increases.

Increased U.S Shale Production & OPEC’s Production Cuts

Despite Saudi’s effect on the markets, the Gross inputs to petroleum refineries increased to a record high of 17.7 million barrels per day amid increased U.S Shale production; 30,000 a day, taking oil prices lower.

Product supplied to the U.S market also increased as inventories as well as exports are at high levels too.

The weekly refinery runs have hit a 17 million barrels per day 24 times since last July however utilization did not follow through due to increased capacity.

The Organisation of Petroleum-Exporting Countries decided to produce less than its current capacity for a longer than anticipated period over fears of crud glut while the U.S shale beats forecasts.

The production target will remain at 32.5 million barrels per day till Q1 2018, however concerns persist as inventories relative to their five-year average level appear to be the main significant reason in OPEC’s decision.

Supply Glut

Analysts have seen Oil plummeting over the past few weeks and breached oversold levels while U.S Crude production rose by more than 550,000 barrels per day since OPEC’s decision to cut output, reaching a surge of exports to almost 1 million in the recent weeks.

The EIA forecasts a rise in production by 860,000 barrels a day till Q4 2017, compared to 210,000 forecasted last November, which in itself raises concerns as to whether the output could be enough to offset lower OPEC flows or not, when of course taking into account the increase in refineries as well.

After OPEC lost 15% of revenues last year compared to 2015, analysts believe that the recent low could be the peak bear of the oil market.

At the same time, U.S export ban lift in December 2015 and Nigerian outages have supported U.S Oil exports, increasing demand for more production, increasing also fears on supply glut as the world could continue to have too much oil.

The increased production, crude supply and oversupply give a different perspective to investors and the EIA’s short term global oil demand outlook with a top priority on OPEC activities, as the chart below indicates.

Any opinions, news, research, analyses, prices or other information contained on this email or linked to from this email are provided as general market commentary and do not constitute investment advice.

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