Market Outlook Improves Pushing Oil Prices Back Up

Oil prices have been riding high as of late, with U.S. crude futures briefly trading above $50 a barrel on renewed optimism that global producers were taking new initiative to drain the supply glut.

Oil Heading Back to Benchmark Prices

Since bottoming out at yearly lows back in June, crude oil has rebounded some 15% in futures trading. The West Texas Intermediate (WTI) benchmark for U.S. crude closed at $50.17 a barrel on 31 July, its highest in two months.

Brent crude, the global benchmark that trades on the ICE futures exchange, reached as high as $52.65 a barrel last week.

Underpinning the latest rally are renewed efforts by Saudi Arabia to curb supplies. Saudi Arabia, which is the world’s second-largest exporter and de facto head of the Organization of Petroleum Exporting Countries (OPEC), announced back in May that it was reducing shipments to the United States and key Asian markets. Cuts to the U.S. are a direct response to higher inventories, which Saudi oil minister Khalid al-Falih believes are depressing global prices.[1]

Why is Saudi Holding Back on Exports?

Although it’s common knowledge that higher oil prices benefit the Saudis and their allies, the urgency to act as soon as possible suggests much more is at stake for the kingdom. For starters, the kingdom needs higher prices to support next year’s Aramco initial public offering (IPO).[2] Investors should take this to mean that Riyadh will be more aggressive in trying to rebalance the market than they had been previously.

A weak USD is Helping Out Oil Prices

Crude futures, which are priced in dollars, have also benefited from a weak U.S. currency. The U.S. dollar is hovering near 14-month lows against a basket of world peers. This has made dollar-denominated commodities much more attractive for holders of foreign currencies.

At the same time, oil bulls shouldn’t expect a smooth ride to the top. In fact, prices remain highly volatile, as evidenced by the recent 2% correction that sent WTI below $49.00 a barrel.

While Saudi Arabia appears committed to rebalancing the market, there are clear signs that OPEC is actually raising output. A recent survey of analysts conducted by Bloomberg suggested the cartel’s July output rose by 210,000 barrels per day. A separate estimate from market-monitoring company Petro-Logistics said the producer group pumped an additional 145,000 barrels per day last month.[3]

Last month, Credit Suisse predicted oil prices will remain capped below $60 a barrel through 2020, a clear sign that market forces were working against the Saudis. The bank said the oil market won’t reach a lasting turning point until the second half of 2018. It’ll take until at least 2019 for the long-awaited rebalancing to occur.[4]

References:

[1] Zainab Calcuttawala (26 May 2017). “Saudi Arabia To Trim Oil Exports To U.S. To Force Inventories Lower.” Oilprice.com.

[2] Gregory Bew (20 June 2017). “Why Is Saudi Arabia Desperate For Higher Oil Prices?” Oilprice.com.

[3] Tom DiChristopher (1 August 2017). “Oil prices tumble 2%, settling at $49.16, after reports of rising output from Saudi-led oil cartel.” CNBC.

[4] Tom DiChristopher (24 July 2017). “Oil prices will be stuck below $60 through 2020, Credit Suisse forecasts.” CNBC.