Analysts do not expect the current slump in oil prices to last much longer despite U.S. crude sinking on Thursday. During the five sessions on that day crude futures dropped in price from $72 to $67 per barrel. International benchmark Brent crude also tumbled $6 per barrel from it’s high of $80.50. However, it has since picked itself back up to $78 a barrel.
Speaking to CNBC, Tamar Essner, the director of energy and utilities at Nasdaq explained that he believes the drop is temporary. He said that the fundamental picture is still strong but the market is a bit dislocated right now.
Indeed, the market is notably risk averse at the moment. This appears to have been stoked by fears that Trump is in the process of starting trade wars as well as by concerns over the integrity of the European Union. These factors have caused the U.S. dollar to strengthen, which in turn makes commodities sold in dollars more expensive to holders of other currencies.
Oil prices were already lowering in the wake of the news that OPEC, Russia and a number of other oil producing nations may wind down their pact to cap production. This pledge has been in place for 17 months now and has been consistently undermined by U.S. shale. Nevertheless, the agreement got rid of a global glut of oil and restabilised the market. However, due to the recent unrest in Venezuela and renewed sanctions by the U.S. against Iran, the policy is now coming under review.
Venezuela’s oil output has dropped a staggering 500,000 barrels a day this year so far. It is also likely that this number will grow or even double by the end of the year. Meanwhile, U.S. drillers are unlikely to be able to ramp up production by 1.2 million barrels a day. Therefore, it is unlikely that the price of oil will continue to plunge in the way it has done recently.
Further to this, the number of American drillers trained in the art of freeing crude oil from shale rock formations is dwindling. The pipeline capacity in Western Texas is also limited. Combined with these factors is the fact that drillers are more invested in providing returns for investors than plowing capital into new production.
Clearly, upping output will be a challenge and on top of all that many drillers have already promised to deliver oil to customers at a price far below where oil sits in the market today.
"They're sort of locked in, and when you look at the slope of the futures curve, it's going downward. That makes it harder to hedge production at attractive prices for further-out years," Essner said.
It is also predicted that were oil prices set to drop below $70 a barrel, OPEC would intervene. While anything below $70 would be too low, anything above $80 would be too high. Therefore, strategies must be developed to keep the price exactly where OPEC wants it.
With regards to the physical market, where oil barrels are bought and sold in order to satisfy actual demand, things look stable. This means that there is no urgency compelling OPEC to drop its production cap. At least until the situations with Venezuela and Iran have been properly assessed.
No comments:
Post a Comment