Oil at $50

Finanza Operativa di Finanza Operativa 15 Maggio 2017 | 13:30

A cura di Walter Snyder, Swiss Financial Consulting

This Newsletter has considered the oil market before and confirms that the oil price is presently behaving in accordance with the forecast made almost two and a half years ago. Oil price charts show that the price has been hovering at $50 (50 US dollars per barrel) for some time.

The Saudi strategy of not reducing production in 2015 so as not to lose market share and at the same time knock American shale producers out of the market was only partially successful in that market share was maintained while American shale oil producers were put under pressure. The result was a reduction in US shale oil production accompanied by a reduction in the number of rigs operating. There was, however, a side effect that the Saudis had not anticipated. The Americans responded by increasing the efficiency of fracking with technological improvements, including horizontal drilling, so that rig production rose significantly. If shale oil producers had operating costs of $80 a barrel before 2015, by 2016 some wells were costing only $20 to produce a barrel and many others were profitable at a price of $40 a barrel.

The result was that as the price went to under $40, the Americans could quickly increase production to take advantage of their newly developed technological advances. The reaction of OPEC was to start negotiating for cuts in production to keep up the oil price. That was not particularly effective as other players, notably Venezuela, Iraq and Iran were not participating. The most recent OPEC strategy for maintaining price levels seems to be short quick cuts in production as opposed to lower long-term production levels. This new policy may result in market share loss as the Americans will quickly increase the amount of oil flowing out of shale rigs in order to compensate for spikes in the market due to erratic OPEC supplies.

As of 14 May 2017 the price of WTI crude was 47.84 and Brent crude 50.84 upon news that US stockpiles were lighter than usual, which perked up the market a bit. In any case it is clear that there is no shortage of supply, and it is the case that supply and demand still determine prices. Should it happen that Venezuela and Libya succeed in achieving some sort of stability, their production could increase significantly and further depress prices. At the moment this is unlikely. If the Syria conflict is resolved, even more oil will be coming out of the Middle East. Geopolitical events will always influence the oil price, which will oscillate around the 50$ level for some time to come. That is bad news for the UAE, the Saudis and the Russians but good news for consumers.

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