This month, the price of crude rose above $55 a barrel to hit a 16-month high as prospects of a tightening market after the OPEC landmark deal led to speculators betting on higher prices.
The decision by OPEC – the acronym for Organization of Petroleum Exporting Countries, to cut oil production by 1.2 million barrels per day paved the way for a demand and supply rebalancing in the oil market. Consequently, this should result in moderate gains in the oil price.
The decision to cut production has been done with the hope of stabilizing the market, which has shuddered in the wake of the 2014 collapse of oil prices.
This is the beginning of the oil price stabilising, Rowena Geraghty, EMEA sovereign analyst for Standish Mellon Asset Management, a fixed income investment boutique of BNY Mellon Investment, told Morningstar in London this week. She added that the OPEC deal would play a key role in U.S. shale oil producers contribution to the market.
Tom Holl, portfolio manager for BlackRock Commodities Income Trust agreed, saying that the OPEC move would effectively bring forward the rebalancing of the oil market. “Over the medium-term, U.S. shale alone will not be enough to meet growing global demand, and oil prices will need to rise to a level which incentivises investment in offshore, deep-water production,” he told Morningstar U.K.
The latest figures from the U.S. Energy Information Administration, or EIA, in its December Short-Term Energy Outlook project oil prices to rise in 2017. The forecast states that Brent crude oil prices will average $51.66 per barrel in 2017 while West Texas Intermediate, or WTI, is expected to stand at $50.66 per barrel.
The forecast is not that cheerful when compared to others. A Reuters poll of 29 analysts and economists forecast Brent crude futures to average $57.01 a barrel in 2017.
In the second half of October, the World Bank upped its oil price forecast for 2017 to $55 per barrel.
Deutsche Bank’s 2017 outlook by strategist David Bianco and his team predict that Brent and WTI crude prices together will average between $50 a barrel and $55 a barrel.
The EIA has doubts on OPEC’s ability to follow through on its deal.
“The extent to which the announced plans will be carried out and actually reduce supply below levels that would have occurred in their absence remains uncertain.” Moreover, a rally will merely spark a revival in U.S. shale drilling, which will “encourage a return to supply growth in U.S. tight oil more quickly than currently expected.” OilPrice.com sums up the stance of EIA well: The OPEC deal won’t fuel the sustained rally that oil bulls have hoped for.
Then again, other countries could play spoiler to OPEC’s decision. If non-OPEC members, mostly Russia, fail to comply, it will minimize OPEC’s output deal and the jubilation will be short lived. When asked if Russia would comply with its part of the agreement, Chris Weafer, senior partner at Macro-Advisory told CNBC: "No, I don't' think so at all."
Also, OPEC has made the decision with a 6-month period in mind. No one knows what will happen after that.
