What To Expect In The Oil Market

By: Sara Nunnally of Street Authority

The latest rumor around the global water cooler that Russia and OPEC-leader Saudi Arabia have agreed to freeze oil production at January or February levels has been dispelled... for now.

The OPEC leaders meeting in Doha failed to reach an agreement to cap production, with Iran bowing out of the meeting altogether, and refusing to pull back on its oil production. As a result, oil prices took a big tumble. Brent crude fell a harsh 7% on the news. West Texas Intermediate (WTI) fell almost as much at 6.6%.

But does a "no deal" result from the OPEC Doha meeting mean production caps are off the table? Or that OPEC wouldn't seek an alliance outside its cartel?


In response to the meeting, Qatar's energy minister Mohammed bin Saleh al-Sada said, "We of course respect [Iran's] position... The freeze could be more effective definitely if major producers, be it from OPEC members like Iran and others, as well as non-OPEC members, are included in the freeze."

Al-Sada said that OPEC members need more time. Which says to me that this won't be the last we hear of production caps.

Indeed, this wasn't the first time we'd heard about potential cooperation between OPEC and Russia, either.

The rumor of a possible oil production freeze lifted oil markets as much as 4.7% and kept prices for WTI above $41 mid-week last week. That means oil prices have been on a wild ride. Take a look at WTI futures:

WTI Futures (4/14/16-4/19/16)

Up and down and up again.

But now that we have the answer to the rumor, the question is... What now? We've already seen oil prices crawl back from their big drop over the weekend.

Well, we have to stick with what we know.

There isn't a corner of the world that isn't touched by OPEC and Russian oil. An alliance would've been extremely powerful, and I would bet that after a little time passes, this rumor will start circling around again. Perhaps then, Iran might be more willing to talk about production caps.

But I'm getting ahead of myself.

We've seen oil prices push sharply higher right up to the Doha meeting. In total, prices climbed 19.5% since Tuesday, April 5 through April 15.

On April 8 we saw firm economic data that stoked optimistic oil demand forecasts. That could help robust economies start to eat into the oil supply glut regardless of whether or not Russia and OPEC had teamed up.

And as that oil glut shrinks, oil prices will climb. That could put U.S. production back on the table if oil prices get in the $50-55 range. In effect, that price level will become a ceiling for oil. And even a New Oil Alliance wouldn't be able to break it.

The key to understanding this dynamic is see it as a slow-burn kind of price movement. Oil gluts don't disappear overnight. And neither does excess production. That's why the U.S. continued to see strong oil production through the end of 2015. And each time we see oil prices tick higher, U.S. producers get ready to ramp up production.

Saudi Arabia and Russia, while they can't seem to get together to agree to halt production, would sure like to see some relief from low oil prices.

Both economies are suffering, and that's why Saudi Arabia, and some other OPEC nations are still hopeful for an alliance down the road.

What To Watch In The Oil Market
But in the meantime, Russia has stated publicly that it would not join OPEC in any production scheme. Saudi Arabia has also said that it would not freeze production levels without the cooperation of its rival, Iran.

The fact that Iran didn't even show up in Doha proves how serious the country is about making up for lost time due to sanction.

We also know that if some freeze does come to be, U.S. producers will start producing again once oil prices climb high enough.

All that put together tells investors that despite the recent rise in oil prices, there's a lot more uncertainty in oil's future. Investors should focus on two things: how much oversupply we have, and how quickly demand is growing. Those are the two factors that will be driving oil prices for the next year or two.

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6 thoughts on “What To Expect In The Oil Market

  1. The big unknown is whether or not the US can get away with a new round of Financial Engineering. Or to put it bluntly whether or not the World will continue to allow the US to maintain the Dollar as the reserve currency of the World. Seems like this strategy may have run its course. There are plenty of corporate dollars out there to support buy backs but that is about it. If the dollar weakens dramatically and it may well take a dive, those dollars will buy a lot less. You can't convince the World, 1 plus 1 is 3 for much longer. Same with oil. There is a glut, everyone in the World can produce more, 5 to 10 million barrels a day of oil could come on line almost over night, let alone a 1-2 million barrel a day difference. Saudi 1 million per day, Russia another .7, US 2 million more, Venezuela and Brasil and Mexico, 3 million if they get their act together, Africa and India, not to mention China, Great Britain and Israel(LNG) the glut is overwhelming especially when you add in Russian and US LNG and NG oil equivallence. $10 dollar oil could be a reality.

    The Fed will be forced to raise rates to maintain the dollar and that will keep pressure on oil. Until
    the dollar finally breaks as a new currency based on a basket of currencies with the Euro, Ruble,Yuan, Saudi Riyal, Yen, and Indias Rupee emerges. The disinflation and race to pump oil will be too much for a number of economies. And of course we will get caught holding the bag because we thinks it is our responsibility to do so.

    1. Thanks for such interesting as well relative illustration.

      Over and above supply data, one must consider rising trend of alternative and hybrid technology in Auto sector, even more and more practically applicable versions of such vehicles are either already introduced or about to launch, which will effect on the overall demand of oil, and that will ultimately hurt "Petronomics" of US. with a never expected fall in the exchange rate of Dollar against most countries.

      I think, "Rise and Drop" game in interest rate,become now just like a teeth and nail less tiger, it can create fear but just cant able to hunt, so now even for FED too, it is far more difficult even just to maintain overall strength and command of Dollar, and most probably, Both above scenarios will be proven as a "win-win" situation for the Net Petroleum and or Gold importing countries like India, with a dramatically rise in the Exchange rate of their currency, not only against Dollar but even against other Strong or hard currencies also.

  2. I don' t agree with that final comment because the market as we know evoluated based on offer and demand sson the thechnical anlaysis express by charts reflected the trend of markets so if one knows the plus and how quickly this quantity is coming down better to really mange the investment in that field

  3. Recent jump we found in Oil is nothing more then a bounce back from initial bottom formation, and after furnishing certain consolidation zone, from which we are passing through currently, Down trend will take place again, and probabilities of getting lower targets of $ 35, 30 and even bellow 30 still very high.

    However present face is more lucrative for swing traders because there will be good chance to find both upper and lower margins, but one must very strictly follow stops for such trades.

    Finally, I think, when we choose Technical view, ultimately, charts are reflecting each and every factors so issues like, " how much oversupply we have", and " how quickly demand is growing" are not so much significant to check.

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