Crude oil prices have been climbing up steadily in the last couple of months as investors continue to expect a balance in the demand and supply dynamics of oil. Last year, OPEC announced that it has worked out a deal with its member nations and some other producers to cut production volumes in order to force an increase in oil prices. Data on oil output in January shows a 90% compliance level among member nations as the promised production cuts become evident. Russia and other non-member nations have also started reducing their output to uphold their ends of the deal.
Oil prices started falling some two years ago after an increase in the supply of oil and a decline in the demand shifted the dynamics of oil trade. The entry of U.S. shale oil and the return of OPEC producers such as Libya and Iran caused the supply of oil to surge. To OPEC’s credit, last year’s deal to reduce the supply has shown that the cartel is not a toothless dog and investors are more optimistic about the prospects of oil. This piece seeks to provide insights into what commodity traders can expect from crude oil going forward.
Oil prices are on a bullish rally
Stakeholders in the global energy industry are optimistic that oil prices will rise – commodity traders must pay attention to this rising bullish sentiment. Since OPEC announced the deal to cut output on November 30, 2016, Brent Crude has gained an impressive 12.93% and the West Texas Intermediate has gained a decent 7.18% as shown in the chart below.
At the start of the new week ending February 24 crude oil was up across the board. April contracts for the Brent crude oil had gained 0.49% to trade at $56.08 per barrel. March contracts for the U.S. West Texas Intermediate was booking gains of 0.32% to trade at $53.95 per barrel.
The aforementioned gain in oil prices is particularly interesting and impressive because investors and traders are bullish even though U.S. producers could erase the production cuts from OPEC by flooding the market with more shale oil. Peter Sawyer, an analyst at Stern Options observes that “an increase in U.S. oil is a worrisome move that could potentially sustain the supply glut and water down the effects of the production cuts that OPEC is celebrating.”
Analysts at Goldman Sachs have observed that U.S. current oil rig count and been increasing for five straight weeks and the increase suggests that U.S. output could increase by 130,000 barrels per day this year. The U.S. Department of Energy also echoes the same sentiments about an increase in U.S. oil output. The Department of Energy notes that U.S. oil production could climb to 9 million barrels per day up from 8.9 million barrels per day in 2016.
In essence, stakeholders must contend with the realities of OPEC’s output cut on the one hand and rising U.S. output on the other hand. However, the fact that global oil prices are rising despite the two sides of the market coin suggests that investors are betting on increased bullishness ahead.
Crude oil is currently enjoying bullish tailwinds because investors are rewarding OPEC with goodwill for pulling off the historic deal to cut oil output. In fact, investors are starting to place speculative trades on the increased bullishness of crude oil. Bloomberg’s CFTC NYMEX crude oil net speculative positions have soared to another record high of 557,570 after gaining 29,704 points. Of course, there’s the attendant risk that crude oil could suffer a massive crash if OPEC loses its bullish goodwill. However, crude oil should continue to rise going forward inasmuch as OPEC continues to record an impressive level of compliance in the deal to cut oil production.