Heroes of Ukraine

«Market Leader» - news and previews making you rich.

Monday, 23 July 09:01 (GMT -05:00)



Stock and commodities markets

Is crude oil really expensive today?


Oil expert Sergei Shelin decided to share with us his thoughts on the processes currently going on in the global oil market. In particular he thinks that crude oil has been struggling to consolidate around 70 dollars per barrel but the thing is that even the world's biggest oil producers and exporters don't believe in high oil prices in the future.

 
On the day he shared his thoughts in his article, Brent oil cost 69 dollars per barrel. Such a high price looks moderate against January's highs. At the same time, it looks great against 56-57 dollars per barrel 12 months ago.
 
So, the observer assumes that if the OPEC really believed in their ability to influence the oil market, they could easily extend the OPEC+ deal forever or at least for several years to come.
Of course, they wish they could make oil prices go all the way up to $110/b after breaking and consolidating above $70/b. However, 10 years ago the committee responsible for monitoring the OPEC+ deal started thinking about closing the deal in 11 months, which basically means the cartel and their partners are probably not going to extend the deal after the agreement expires. In order to avoid market panic, they promised to avoid any abrupt moves while thinking carefully about each next step.
 
 
 
Chances are, they are really going to do this. However, there are still chances that they are not going to follow this plan. Today, quitting the deal is not the most likely scenario. First of all, we should keep in mind that starting to produce more oil will definitely result in lower oil prices amid bigger supply. However, it seems like they are not planning to fight for $80/b.
 
So, in order to reason the unreasonable behavior of the cartel and their non-OPEC friends, we need to answer another question and find out how strong the oil rally has been.
 
The expert reminds us that 12 months ago, the EURUSD exchange rate and the Brent oil price used to be 1,07 and 53 euro respectively. Now EURUSD is 1,24 and Brent oil is 53 euro at this exchange rate. The thing is that the U.S. Dollar has become much cheaper against o her majors, which is why most of the oil gains are mostly of this nominal nature based on another exchange rate.

 

No more expensive oil in the long run

 
Anyway, the prices are up, even though the rally has been driven by a number of factors. Iran, Saudi Arabia, Iraq have been waging wars, there are tensions in the Korean peninsula, natural disasters have been affecting shale oil production in the United States, Venezuela and Libya have crashed on their oil production. The global economy has been growing confidently. All of that has been backing the oil rally.
 
On the other hand, all of these factors haven't canceled the ones working against high oil prices. For now, we know that on 2016, the American oil production used to be 8,8 million barrels a day on average. In 2017, it boosted all the way up to 9,4 million b/d. At this point, it's over 9,9 million b/d and still growing. Most probably, it's going to exceed 10 million b/d in February 2018. At the same time, some other non-OPEC oil producers have been boosting their oil production as well over the last few years.
 
So, the current production increase in those states should be compared against the 1,8-million-b/d production cut implemented by the OPEC according to the OPEC+ deal. Apparently, the deal seems to be losing efficiency while the production cut is likely to be covered by the production growth in the United States alone. So, the cartel and their allies may respond with either backing up on the deal to trigger a price crash or with tougher measures and bigger cuts.
 
Saudi Arabia and Russia are the key players in the oil deal. In 2017, the Saudis used to be producing around 10 million b/d and cut it by 0,5 million b/d while the Russians used to be producing around 11 million b/d after cutting their production by 0,3 million b/d. At the same time, Russian natural gas companies increased their production and export by 9% and the Russian oil and gas industry is not planning to cut down on it. As for the Saudis, they are unlikely to cut their production as well since they have already lost billions of dollars in profits. So, the expert says that even today's deal has been making the participants lose some of their market share, not to mention any further cuts if any. As for the USA, since 2016, the local production increased from something insignificant all the way up to the production levels of Kuwait. If American shale oil companies keep up the pace, they may take the American oil production to the level of Iraq and Iran. With that being said, the exert seriously doubts that Russia and Saudi Arabia will yield their market share to the United States that easily. If the deal still exists, this may happen in 12 months. But minor participants are unlikely to continue with the deal and lose even more of their market share to shale oil companies, which is why they are expected to quit the deal. Chances are other participants will follow.
 
The only things that can help them to back higher oil prices are major wars, disasters and much faster global economic growth. While no war or disaster is good, economic growth can only be temporary. Anyway, expensive oil is either a sign of misfortune or an illusion.
 

 

You are free to discuss this article here:   forum for traders and investors

 

Add to blog
Got a question? – Ask it here »
 

Oil Prices May Skyrocket to $400/b if Iran Blocks the Strait of Hormuz

Blocking the Strait of Hormuz will inevitably trigger a global energy crisis while pushing oil prices to unseen heights, maybe even all the way up to $400/b. This is what the experts interviewed by PRIME think about the situation.

Publication date: 19 July 09:45 AM

Higher OPEC+ Production Quotas Won’t Raise Oil Prices, Kudrin Says

Chairman of the Russian Accounts Chamber Alexei Kudrin assumes that the OPEC+ participants’ decision to increase the daily oil production quotas won’t affect international oil prices.

Publication date: 16 July 09:58 AM

Trump Urges OPEC to Raise Their Daily Oil Production by 2M Barrels

Donald Trump claims that the OPEC should raise their daily oil production by 2 million barrels. During his interview to Fox News, he accused the oil cartel of manipulating oil prices.

Publication date: 05 July 11:47 AM

OPEC+ Participants Want to Make the Deal Indefinite but Without Quotes

According to Russian Minister of Energy Alexander Novak, the leaders of Russia and Saudi Arabia decided to extend the OPEC+ deal. The minister said that this decision to make the deal indefinite in time took place not so long ago in Moscow. 

Publication date: 27 June 11:27 AM

Saudi Arabia Raises Oil Prices for Asian and European Buyers

Saudi Arabia is reported to have raised oil prices for Asian and European importers. This is confirmed by Bloomberg.

Publication date: 09 June 10:26 PM

Market Players Play Oil Price Guessing Games

The international market of crude oil seems to be in panic. Yet, the panic is snowballing. The reason for that is said to be the statement made by Russian Energy Minister Alexander Novak about the possibility of easing the OPEC+ deal in June 2018, which came as a surprise to the international trading community.

 
Publication date: 29 May 01:41 PM

USA Outpaces Russia to Become World’s Biggest Oil Producer

In March 2018, the United States outpaced Russia in terms of oil production. This means that the USA is now the biggest producer of crude oil in the world.

Publication date: 24 May 11:26 AM

Crude Oil Goes Above $80/b, Morgan Stanley Improves Oil Forecast

On Thursday, May 17th, Brent oil exceeded $80/b for the first time in 3,5 years. The last time the price reached this level was on November 25th, 2014.

Publication date: 17 May 11:20 AM

Oil Prices At $79/b, Russian Ruble Still Weak. Why?

On Tuesday, May 15th, Brent oil reached $79/b. Strange as it may seem, the Russian Ruble hasn’t reacted to this so far, even though this always has been a positive sign for Russia’s national economy and currency heavily reliant on crude oil prices. Moreover, the currency has been going slightly down for a while despite being backed by higher oil prices.

Publication date: 15 May 01:19 PM

Russia Isn’t Interested In OPEC+ Anymore

Right in advanced of the forthcoming OPEC+ summit some experts doubt that Russia is still interested in the agreement. The strategic objectives of the OPEC+ deal are almost reached. The imbalance in the global oil market has almost been eliminated. The cost of a barrel of Brent oil has increased by more than 100% since late 2016. At this point Brent oil is trading above 70 dollars per barrel. On Q1 2018, the OPEC made 400 million dollars a day more than 12 months before.

Publication date: 28 April 07:57 AM