OPEC worked out a deal in May to extend the current production cuts as part of efforts to end the supply glut that has crippled oil prices in the last couple of years. However, it doesn’t seem that an extension of the production cut will have a material effect on ending the supply glut. In the third trading session in June (June 5), Brent crude lost its early morning gains to end the session around $49 per barrel. The West Texas Intermediate (WTI) recorded losses to end the session at $47.33 per barrel.
Interestingly, the market is divided about the fate of crude oil because the opposing bullish and bearish forces appears to be equally matched in the current fiasco. This piece looks at two major factors that could determine how crude oil prices will fare in the near-term.
President Trump could increase U.S. oil and gas drilling
On June 1, 2017, U.S. President Donald Trump withdrew the United States from the Paris climate accord. Trump’s action though jarring doesn’t present much of a surprise because Trump had maintained while on the campaign trail that climate change is nothing more than a hoax. However, the fact that Trump withdrew from the Paris climate accord indicates that he might start pushing for an increase in U.S. oil and gas drilling activities.
U.S. crude data shows that U.S. crude oil production has jumped by 10.8% over the 2016 lows. U.S. shale oil drillers have increased their oil rig count by 125.5% year-over-year. More so, the EIA has forecasted that U.S. crude oil production will jump to a 48-year high next year if the production continues to increase at current levels.
If President Trump goes ahead to push for an increase in U.S. crude oil, production, you can reasonably expect that the production cut from OPEC won’t do much in ending the supply glut in the market. In fact, market bears can expect crude oil prices to fall lower if U.S. crude oil production continues to rise.
Qatar rift could lift crude oil prices
It is no longer news that the Middle East is a volatile keg of gunpowder waiting for the next bout of political unrest. Breaking news has it that five Arab nations have decided to sever diplomatic ties with Qatar on the ground that Qatar is sponsoring terrorism. Saudi Arabia, Yemen, Egypt, UAE, and Bahrain have all announced that they will break ties with Qatar. The five countries also accused Qatar of trying to destabilize the Middle East because of its dealings with Iran and its support for Islamist groups.
Qatar is a stakeholder within OPEC and the broken relations between Qatar and other Arab countries suggests that OPEC’s deal to extend oil cuts is already wobbling. For what it’s worth, Qatar is the biggest supplier of liquefied natural gas (LNG) and the country has the power to move the markets for condensates.
Qatar has responded to the severing of diplomatic ties noting that there’s “no legitimate justification” action on the part of its neighbors. Qatar has also drawn a line in the sand nothing that it citizens would not be affected by the “violation of its sovereignty”. If the political infighting within the Arab world spills over into OPEC, the organization will have a much harder time getting its Arab member-nations to commit to the production cuts.