Here’s the catch-22 for the oil market
Oil prices could be heading lower as OPEC dithers, the election raises fears and traders stand on the sidelines.
OPEC will dictate where oil prices head for the remainder of the year and into 2017 and the organization’s failure to come to an agreement at its recent Vienna meeting is telling – the major sticking points are the same ones that have been in contention since negotiations began.
Everyone wants to boosts prices by cutting production but no one wants to actually cut. Iran wants to return to pre-sanction production levels, Iraq claims it needs the funds to help fight its war with ISIS, Nigeria along with Venezuela are facing economic hardship and in both places are trying to replace production lost due to conflict or lack of resources to maintain equipment.
At the last meeting, the consensus was that if any production cuts are to be made, the Saudi’s will have to do the majority of the lifting, and they are not ready to commit to that because they face their own budget issues and dwindling cash reserves.
If OPEC fails to reach an agreement before or at their formal meeting at the end of November, then oil prices will fall to the low 40’s and possibly the mid 30’s. Driving this drop will be the factors that drove it lower at this time last year: too much supply and falling demand as we head into winter and the fallout from a potential Fed rate hike, which will mean a stronger dollar and lower equity prices.
Many traders are taking a pause for the remainder of 2016, anxious not only about OPEC’s moves but also about the presidential election. Both candidates’ policies could prove negative for oil prices.
Many feel a Clinton victory will mean higher fuel prices mainly due to regulations that will be placed on their production and use as the country accelerates its push to green energy.
A Trump victory is viewed as bearish for prices as he has promised to approve more Federal land for drilling and green light the Keystone pipeline which would open up many more areas for oil production.
The latest Commitment of Traders Report shows that managed money has reduced a number of their long positions and added to shorts which signals a belief by them the market has taken a more bearish outlook.
As we head into spring of 2017 there will be increased demand for oil in anticipation of the summer driving season and prices will rebound but if OPEC has failed to curb output which is fast approaching 34 million barrels a day, the rebound will barely reach the $50 level.
If OPEC is able to come to an agreement at the upcoming meeting, then prices will have a floor and move higher by the beginning of 2017. Whether they can reach $60 dollars will depend on how fast U.S. production increases. There are many wells in this country ready to flow and a solid price move above $50 that lasts a few months will give the operators confidence in the wells profitability.
But here is the catch-22: As prices rise, production increases causing over-supply and prices to fall. So unless there is a major disruption in supply, prices in 2017 will stay between the $50 to $60 level.
If OPEC fails to reach an agreement, prices in 2017 will run between $40 to $50 a barrel. This is not much of a difference and highlights the headwinds OPEC is facing: Because of technology, oil is easier to produce and because of technology and alternatives like wind and solar, consumers will be using less oil every year. This is not good for OPECs over-all business model.