Will oil supply growth derail the OPEC agreement?

As 2016 came to a close, oil markets were buoyed by optimism about the successful implementation of OPEC’s agreed upon production cuts.

That optimism reflected the belief that by collectively reducing their output, leading oil exporting countries would be able to shrink the swollen global inventories that were pushing oil prices down. The same optimism sparked an oil futures rally that pushed prices through the $50 bbl. threshold, with expectations that they could go much higher once 2017 arrived.

In early January, one OPEC exporter after another stepped forward to announce its commitment to the production cuts mandated by the agreement. As a result, oil prices surged to the mid-$50s. Talk of $60-bbl. prices — or higher — soon dominated the news. The World Bank is now projecting greater global economic growth this year after citing Brazil and Russia as prime examples of countries with increased growth outlooks due to higher oil prices.

In recent days, oil markets started fretting about higher oil exports from Iraq and increasing oil production in the U.S. In fact, analysts believe that these trends might offset much of the OPEC production cuts, keeping global inventories higher than anticipated and oil prices lower than desired.

For the next few weeks, oil analysts will dig into oil shipping and trading data seeking confirmation of which way the market might go in 2017. As usually happens with commodity markets, traders’ emotions outpace data. Not knowing when, or if, industry data will produce concrete evidence that oil output is either stable or finally falling, will keep emotions on edge and easily susceptible to rumor. That means oil prices risk becoming highly volatile in the near term.

If oil production starts growing as OPEC cuts output, oil market optimism may disappear quickly as it becomes clear that the world truly is awash in crude oil. Then, only much higher economic growth — far from certain — will sop up the oil oversupply. Let’s hope President-elect Trump’s policies can accelerate our economic growth, becoming the engine that pulls the world’s economy along.

A long wait for clarity on oil market trends could make 2017 a frustrating year.

About the author

G. Allen Brooks

G. Allen Brooks is a 40-year veteran of the energy and investment industries, serving as an energy securities analyst, an oilfield service company manager, a consultant to energy company managements and a board member of several oilfield service companies. He is the author of the highly regarded energy newsletter “Musings From the Oil Patch” that interprets trends within all sectors of the energy business.

2 Comments

  1. As a private and commercial user of diesel, I hope the frackers get busy. The oil companies and OPEC have been screwing consumers for 45 years with artificially high priced fuel. The politicians are no help, closing areas to exploration or drilling. Fuel is the lifeblood to the worlds economy. Until something better comes along, we need fuel at reasonable prices.

  2. Adrienne - Mulholland Energy on

    We agree that consumers could easily become wary about the oil industry if and when this occurs. Fuel and oil must remain reasonably priced.

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