How Slick Are Oil Prices?

Trading Oil to the Downside

WTI crude oil is currently trading at $48.43 per barrel on the Nymex and Brent crude oil is currently trading at $51.61 per barrel on the ICE. The price of crude oil has plunged approximately 10% over the past 8 days, ruffling the feathers of many in the oil industry. However, Saudi Arabia came out all guns blazing on Tuesday, 14 March and restated its commitment to stabilizing the global oil market. There are discrepancies about the quantity of oil produced and exported by Saudi Arabia, and the amount the country claims to have pumped during February. The subsequent uncertainty led to a massive selloff of crude oil as speculators shorted the commodity on the markets. In November 2016, the world’s biggest oil cartel, OPEC, agreed to cut production to reduce oil inventories. The OPEC agreement came into place in January 2017. While prices have risen somewhat since then, recent trends have been bearish. The Saudi’s admitted to some misunderstanding between the agreed-upon figures, and the actual figures.

Saudis Spin Oil Supply Numbers to Calm Speculative Sentiment

The Kingdom of Saudi Arabia reported that it was producing 9.9 million barrels per day (February 2017), lower than the 10.1 million barrels per day that it agreed to with other OPEC producers. The compliance percentage among OPEC countries was 91% in February, but only 40% with Russia. By Wednesday, 15 March 2017, crude oil prices were up 1.6% following Saudi Arabia’s clarification. There is tremendous anxiety in oil markets, particularly from OPEC countries who are hoping that the price will remain above $50 per barrel throughout 2017. At this price level, OPEC producers would be able to meet budgetary targets while keeping US shale oil producers unprofitable. The higher the price crude oil rises, the greater the enticement for WTI crude oil producers to enter the market. This ultimately results in excess supply and decreased prices.

Unfortunately for Saudi Arabia and other OPEC countries, US oil production is on the rise. According to the EIA (Energy Information Administration), the number of oil producers has consistently risen for 5 months on the trot. By February 2017, US oil producers were pumping out 9 million barrels per day – the highest level in 1 year. The increased output is facing challenges from declining demand. As growth wanes in 2017, oil producers will be unable to eliminate the supply glut that has been growing. Any hopes of a rebalancing of the oil markets were quickly dashed by the International Energy Agency (IEA) which called for patience from investors.

Will the Oil Glut be Over in 6 Months?

The oil glut is certainly not over, but there is a rebalancing taking place in the markets. The most pressing concern for traders is whether OPEC countries and Russia will stick to their production cuts as agreed upon last year. According to the International Energy Agency, the global oil market could be undersupplied by up to 600,000 barrels per day by the end of Q2 2017. The November production report for OPEC had it producing 34.2 million barrels per day, while Russia was producing 11.2 million barrels per day. Such excessive production numbers are directly responsible for high inventory levels and disequilibrium in oil markets. Aggregate demand is far less than aggregate supply, and this is putting downward pressure on the oil price. Another concerning fact is that Nigeria and Libya have been exempted from complying with the OPEC deal. If their production numbers increase, it could render the OPEC agreement null and void.

How Will US Oil Producers React to Decreased OPEC Production?

OPEC is currently targeting a price range of $55 per barrel – $60 per barrel for Brent crude oil. That price range would also entice many US oil producers back into the market. The IEA reports that US shale oil production is rapidly recovering, with many more oil rigs becoming active as prices rise. With the massive snowstorms racking the Northeast United States, demand for crude oil is quickly increasing, and pushing up the price accordingly. OPEC’s desire to cut production volume will raise prices, but that benefits WTI crude oil producers as well. There is an interesting dynamic taking place with the midsized oil producers in the US. They have increased their investment expenditure for 2017, while the major oil producers including Chevron, Exxon Mobil and Total are cutting back on their investment spending for the year. It looks like the US shale oil producers will recover marginally in 2017, but not the major oil companies like Chevron, Exxon Mobil, British Petroleum and others.

How Will Trump’s Corporate Tax Policy Affect the Oil Industry?

If the corporate tax rate declines from 35% to 20% or even 15%, the oil industry will enjoy a windfall of savings. The Trump administration has been pushing hard for a revision of corporate taxes, despite deep divisions in Congress. If the corporate tax rates are cut, US oil exporters will have an additional $10 billion available in their coffers. The market is extremely volatile at this juncture, and increased drilling in shale oil fields has helped to drive down the price of crude oil even when OPEC producers are seeking to cut production. It is entirely possible that the 2-year low price of crude oil ($26.05 per barrel in February 2016) could be revisited if too much oil is being pumped out. The theory behind the $10 billion magic number is that tax savings would be diverted to domestic drilling. WTI crude oil was trading at a high of $55.24 per barrel on January 3, 2017, but it has come down precipitously to just $48.47 per barrel this week. When the market collapsed in May 2016, the number of US drilling rigs in operation was at a multiyear low, according to Baker Hughes. It has increased by 100% since May and there are now 617 active rigs.

Canada’s Oil Industry Set to Lose Big-League in 2017

The Canadian oil industry is staring down the barrel in 2017. According to the CBC (Conference Board of Canada), global demand is expected to increase, but the oil industry will not return to positive territory until Q4 2017. The reason being: Canadian oil production began from an extremely weak position. Overall, the CBC estimates that oil companies will lose C$1.1 billion before taxes for the year. In 2016, oil companies lost $8.6 billion. For most of 2016, the oil price was hovering around $40 per barrel. Now, the oil price has recovered somewhat and WTI crude oil and Brent crude oil are trading in the $50 – $55 per barrel range. Analysts are expecting the oil price to increase to $70 – $80 per barrel by 2021. This is precisely why oil companies are formulating strategic plans for investment and exploration. The short-term prospects for crude oil are certainly bearish for binary options traders, but long-term the oil price is going to rise and windfall profits will ripe for the picking.