Oil expert Sergei Shelin decided to share with us his thoughts on the processes currently going on in the global oil market. In particular he thinks that crude oil has been struggling to consolidate around 70 dollars per barrel but the thing is that even the world's biggest oil producers and exporters don't believe in high oil prices in the future.
On the day he shared his thoughts in his article, Brent oil cost 69 dollars per barrel. Such a high price looks moderate against January's highs. At the same time, it looks great against 56-57 dollars per barrel 12 months ago.
So, the observer assumes that if the OPEC really believed in their ability to influence the oil market, they could easily extend the OPEC+ deal forever or at least for several years to come.
Of course, they wish they could make oil prices go all the way up to $110/b after breaking and consolidating above $70/b. However, 10 years ago the committee responsible for monitoring the OPEC+ deal started thinking about closing the deal in 11 months, which basically means the cartel and their partners are probably not going to extend the deal after the agreement expires. In order to avoid market panic, they promised to avoid any abrupt moves while thinking carefully about each next step.
Chances are, they are really going to do this. However, there are still chances that they are not going to follow this plan. Today, quitting the deal is not the most likely scenario. First of all, we should keep in mind that starting to produce more oil will definitely result in lower oil prices amid bigger supply. However, it seems like they are not planning to fight for $80/b.
So, in order to reason the unreasonable behavior of the cartel and their non-OPEC friends, we need to answer another question and find out how strong the oil rally has been.
The expert reminds us that 12 months ago, the EURUSD exchange rate and the Brent oil price used to be 1,07 and 53 euro respectively. Now EURUSD is 1,24 and Brent oil is 53 euro at this exchange rate. The thing is that the U.S. Dollar has become much cheaper against o her majors, which is why most of the oil gains are mostly of this nominal nature based on another exchange rate.
No more expensive oil in the long run
Anyway, the prices are up, even though the rally has been driven by a number of factors. Iran, Saudi Arabia, Iraq have been waging wars, there are tensions in the Korean peninsula, natural disasters have been affecting shale oil production in the United States, Venezuela and Libya have crashed on their oil production. The global economy has been growing confidently. All of that has been backing the oil rally.
On the other hand, all of these factors haven't canceled the ones working against high oil prices. For now, we know that on 2016, the American oil production used to be 8,8 million barrels a day on average. In 2017, it boosted all the way up to 9,4 million b/d. At this point, it's over 9,9 million b/d and still growing. Most probably, it's going to exceed 10 million b/d in February 2018. At the same time, some other non-OPEC oil producers have been boosting their oil production as well over the last few years.
So, the current production increase in those states should be compared against the 1,8-million-b/d production cut implemented by the OPEC according to the OPEC+ deal. Apparently, the deal seems to be losing efficiency while the production cut is likely to be covered by the production growth in the United States alone. So, the cartel and their allies may respond with either backing up on the deal to trigger a price crash or with tougher measures and bigger cuts.
Saudi Arabia and Russia are the key players in the oil deal. In 2017, the Saudis used to be producing around 10 million b/d and cut it by 0,5 million b/d while the Russians used to be producing around 11 million b/d after cutting their production by 0,3 million b/d. At the same time, Russian natural gas companies increased their production and export by 9% and the Russian oil and gas industry is not planning to cut down on it. As for the Saudis, they are unlikely to cut their production as well since they have already lost billions of dollars in profits. So, the expert says that even today's deal has been making the participants lose some of their market share, not to mention any further cuts if any. As for the USA, since 2016, the local production increased from something insignificant all the way up to the production levels of Kuwait. If American shale oil companies keep up the pace, they may take the American oil production to the level of Iraq and Iran. With that being said, the exert seriously doubts that Russia and Saudi Arabia will yield their market share to the United States that easily. If the deal still exists, this may happen in 12 months. But minor participants are unlikely to continue with the deal and lose even more of their market share to shale oil companies, which is why they are expected to quit the deal. Chances are other participants will follow.
The only things that can help them to back higher oil prices are major wars, disasters and much faster global economic growth. While no war or disaster is good, economic growth can only be temporary. Anyway, expensive oil is either a sign of misfortune or an illusion.
