Oil prices rallied to Multi-Years High back above the $70/bbl psychological barrier on the tenth consecutive week of US crude oil inventory drop to 412 million barrels, their lowest level since February 2015. This steady decline in inventories spurred strong speculative activities to buy in futures markets after a three-year of low performance.
On the closing week of January 26, 2018, Brent price rose to $70.52/bbl, and Nymex rose to $66.14/bbl. Brent/WTI spread narrowed to $4.38/bbl. If this gap continues to shrink further, it will certainly affect the attractiveness of US light crude oil exports!
When we compare Brent price average for January 2016 at $30.70/bbl (the lowest level since December 2003), compared to Brent price average in January 2018, nearly $40/bble higher than the price average for January 2016. Although this winter is less severe than that winter, which seasonality did not affect demand growth much by then!
Assertively, oil markets neglected IEA's pessimism, and prices upward trend has returned illustrating effective correction efforts! Oil prices fell last week after the International Energy Agency (IEA) addressed hypothetical challenges for 2018 and overvalued the impact of US shale revolution on OPEC output cut to curb the upward trend in prices and undermine OPEC's efforts to balance the market. Though supply remains high with US oil production expected to hit 10 million barrels per day soon after already reaching 9.88 million barrels a day, rising US output isn’t threatening to undermine supply restraint led by OPEC because it’ll be absorbed by the market to compensate for other supplies deficits.
Regardless of the estimated global economic outlook growth for 2018 and 2019, and the deterioration of the US dollar against the basket of other currencies that might have slightly supported upward movement in oil prices, yet the upward momentum continued since the end of October 2017, while the dollar remained weak against the basket of major currencies since June 2017 when oil prices were about 60% lower than the current levels.
The supply / demand balance is getting closer to a healthier oil markets with a potential recover by the 4th quarter of 2018, such recovery calls for continued work to maintain the markets balance even beyond 2018, and this requires continuing efforts to control output after 2018, even with a different mechanism, which reflects the need of continuation of OPEC role.
Energy and Oil Marketing Adviser
(Former OPEC / Saudi Aramco)