Crude Oil Prices

Where exactly is crude oil prices headed from here?

The price of crude has had a volatile period since the beginning of 2016. After touching a low of around $30/bbl in early 2016, crude bounced back sharply to almost the $45 level. It was only post November that Brent Crude actually breached the $50 mark decisively and perched closer to the $56 mark. However, over the last few days, the price of Brent is back to around the $50 mark. Where exactly is Brent headed and what could determine the road ahead for crude?

OPEC will play a bigger role… 

The big surge in crude oil came after November 30th when the OPEC decided to voluntarily cut supply. While the OPEC agreed to cut daily supply by 1.2 million barrels, friendly non-OPEC nations like Russia and Mexico agreed to cut output by 0.6 million barrels. This resulted in a total cut of 1.8 million barrels per day (bpd). Interestingly, the effect of the production cut on actual Brent supply and price will be only visible from this month onwards. One thing is clear that the OPEC still has the power to influence prices and that is something the OPEC will not want to cede easily. Hence the oil supply quotas may continue. The big worry was that the 6-month quota agreement expires in June. For now, it looks like the OPEC will continue with its quotas and other friendly nations will be willing to support the same. At least, it has served to stabilize crude oil prices for now!

US may not play spoilsport

One of the worries for the OPEC was that a rise in oil prices will enable many of the inactive US shale wells to become viable once again. That has definitely happened in the recent past as the Baker Hughes index has indicated a consistent addition to the number of rigs in operation in the US. Additionally, shale extraction is one of the key thrust areas for Donald Trump. He not only plans to incentivize shale further but also wants to allot more national land for shale extraction. For the US to handle such a vast increase in supply, it will need a robust market across the world. Historically robust demand and spending has been seen across the world only when oil has been at elevated levels. Low oil prices have been periods of economic strife and deflation. That will defeat the entire American purpose. Surprising at it may sound; the US may also tacitly help the OPEC and Russia in keeping crude oil prices at remunerative levels in the future. 

Where does that leave oil prices?

Even with a large dose of optimism, the oil prices are unlikely to see the levels of $100/bbl any time soon. That is unlikely with so much supply in the sidelines. What could happen is that the oil could stabilize in the range of $50-60/bbl with the potential to briefly get closer to the $70 mark. Supply at $70 will be just too huge to sustain. Time for firm oil! ©

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