Starting in 2014, Saudi Arabia and other OPEC members opened the taps on oil production worldwide, even as data showed that global economic growth was beginning to diminish. This decision was responsible for creating the largest oil glut in recent times, plunging oil prices to as low as $26 per barrel in February 2016.
However, after two years of pain, it finally appears that this commodity is due for an extended rally, as supplies are finally beginning to tighten, and a sizeable OPEC production cut is set to take effect starting this month.
In spite of these positive signs, those trading on platforms such as ETX Capital are still trying to determine whether this is the year when oil will finally return to growth.
The Effect Of OPEC Cuts
The removal of 1.8 million barrels per day from global markets will have a significant effect on the supply/demand equation, although the initial price increases may be blunted by the massive amounts of oil still locked up in storage facilities around the world.
However, as driving season revs up in the Northern Hemisphere, increased demand will begin to chew away at the glut that currently exists.
With a significant decrease in supply from OPEC, the amount of oil in storage will eventually decline to the point where investors will view the state of energy supplies to be in a precarious state. At this point, increases in the price of oil will be at their steepest, but as one moves into the second half of 2017 and into 2018, there are several factors that will act as a headwind for any further increases in the price of crude.
Global Economic Growth
While the action taken by OPEC recently seeks to address the supply side of the oil glut, global demand has been stubbornly anaemic over the past several years.
China lies at the centre of this problem, as its formerly torrid pace of growth has slowed to the historically low rate of 6.9% in 2015. This was the country’s slowest pace of GDP expansion since 1990, dating back to the time when the communist nation was in the process of liberalising its trade policies with the West.
After a brief burst of economic growth following a stimulus initiative in the wake of the global financial crisis, growth in its annual economic output has steadily fallen since 2010.
If China can find its footing and resume annual growth in excess of 8% a year, then the prognosis for oil prices in the medium to long-term will likely be positive.This has had a domino effect on the global economy, as commodity producers have begun to suffocate under a surplus of raw materials that China used to buy in abundance just a decade ago.
However, if it continues its evolution into a mature economy with growth rates that are more in line with Western countries, the overproduction issues that have plagued commodity producers may persist for the foreseeable future, dragging down oil prices with it.
Shut-In Producers Returning
Should the OPEC production cuts work as intended, oil prices are expected to stay well above $55 through the first half of 2017. Some optimistic forecasts have the price of crude testing $70 later this summer, but even if more pessimistic values hold, a large number of shut-in oil wells will soon become profitable again.
Once it becomes apparent that these elevated prices are sustainable, producers in free-market economies will begin pumping oil in earnest to cash in on the recovery.
With a rapid improvement in enhanced oil recovery techniques and an expected increase in the number of rigs that are actively producing, the available supply in the latter half of 2017 and into 2018 is expected to increase.
In spite of the measures taken by OPEC to curtail the amount of oil that will be available on the global market in 2017, increased production outside the trading bloc will likely close the gap as time progresses.