Oil pricing : Analysis

How did oil fare in 2017?
  • The price of oil rose this year as the supply-cut agreement signed by the Organisation of the Petroleum Exporting Countries (OPEC) in 2016 managed to survive despite a lot of speculation otherwise.
  • Brent crude oil trades at around $64 a barrel currently, which represents a gain of over 12% year to date, after dropping to an intra-year low of just below $45 in June.
  • It is notable that the price rise this year looks quite subdued compared to the rally last year which saw prices almost double after dropping below $30 in January.
  • Still, the current price of oil is far from the historic highs, of well over $100, that lasted until the latter half of 2014.
Oil Pricing Dynamics
  • Like in the case of any other commodity, supply and demand determine the price of oil.
  • On the supply side, shale oil producers in the United States, who killed a multi-year bull market in oil by ramping up global oil supply, are still the biggest threat to any significant rise in oil prices.
  • Another problem that is likely to crop up as the price of oil slowly heads up north is the rising threat of OPEC members cheating on the supply-cut agreement. This could push down oil prices down as some rogue producers, wanting to exploit higher prices, will increase their investment and output.
  • On the demand side, the shrinking of world money supply as central banks, particularly the U.S. Federal Reserve which supplies dollars used as currency in the oil market tighten monetary policy, will exert a downward pressure on the price of oil.
Where will oil go in 2018?
  • Last month, OPEC agreed to extend its supply-cut agreement until the end of 2018, which has led some analysts to stay bullish on oil.
  • Agencies such as the International Energy Agency and the U.S. Energy Information Administration, however, foresee shale production rising in 2018 and beyond. If so, this should cap any significant rise in oil prices unless there is an equally strong response from OPEC to cut supply.
  • In all, a secular bull market in oil looks unlikely given the stiff resistance offered by U.S. shale producers, who have shown their ability to cut costs at quick notice and survive in a bearish environment, against OPEC.
  • Geopolitical tensions, however, may offer OPEC some brief respite at times.

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