This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.
Oil markets have been treading water in recent months, with the bullish breakout of early December failing to follow through. Much has been said in the past year, with the Saudi leadership seemingly facing a defeat in its attempts to thwart the US shale boom. The subsequent output cut represents one of the biggest crude production restrictions in history. However, while we have seen oil prices rise in response, this has seemingly hit a ceiling around the $60 region. This piece seeks to address where we currently stand and what the next driver of oil prices will be.
The past week has seen a wide range of factors pushing and pulling price, from inventory data and rig counts, to reports from the IEA and OPEC. The trend within US inventories is one of significant build-up, with both API (14.2m from 5.8m) and EIA (13.8m from 6.5m) showing a massive build-up in stockpiles. The former sparked a sharp deterioration in crude, whereas the latter failed to do so given the simultaneous drawdown in gasoline stocks.
On the rig count front, there is a clear trend in place, with continued ascent of rigs pointing towards a forthcoming ramp up in US production. But this is happening at a relatively slow pace for now. It is worth noting that at the time of the initial crude price fall, the fracking process was relatively expensive. This is less of an issue now, given the fact that input prices have been driven down and producers are much more streamlined than before.
Last week’s report from the IEA and today’s OPEC release pointed towards a significant conformity from members, contributing to a circa 90% compliance with the output cuts agreed upon. Interestingly, we are now starting to hear tones from the Kuwaitis that we could soon see the cuts extended to non-OPEC members.
Ultimately it will come down to the question of whether we see demand rise and output fall, as has been speculated by the likes of the IEA and OPEC. Otherwise, a sharp rise in US output could see everything come crumbling down. Bear in mind that a rise in US output would mean that it starts to grab market share away from those implementing cuts. It would not be tolerated for long, and it is likely the US could undermine the conformity rate with regards to output cuts. The next OPEC meeting is not until late May, and thus we will see the US shift the market in the meantime. Keep an eye on the rig count as a precursor to US production moves. It is likely that any sharp rise in output would undermine the gains we have seen so far for crude.
.jpg)
