Until mid-2014 oil prices hovered between $100 and $125 but then a sudden slide occurred. There were numerous reasons behind such a severe slump including Chinese economic slowdown or rampant US output. Economies relying heavily on oil such as Russia, Venezuela or Saudi Arabia experienced a sharp GDP growth deceleration. Between mid-2014 and the beginning of 2016 Brent prices plunged 75%. However, we have had a steady increase ever since and prices are already up more than 200% since they bottomed out. Along with higher crude prices forecasts for the global economy deteriorate. Some commodity experts signal that prices could rise even toward $100. We are presenting some pros and cons behind such a scenario.
Bulls camp:
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Upcoming Trump’s sanctions will come into force in November. Furthermore, Donald Trump wants to choke Iran’s oil exports. European Union, Russia and China plan to create a special vehicle to bypass sanctions, but some countries may fear US President’s reactions for possible making businesses with Iran by them. What’s interesting, more significant Indian refineries did not order any oil delivery from Iran for this month.
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Supply losses from Venezuela could intensify market participants’ concerns. What’s more, situations in Libya, Nigeria and Iraq are also not optimistic.
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OPEC and Russia could purportedly replace a part of Iranian losses, but they seem not to be eager to increasing their oil outputs. Even if they want to significantly increase oil drilling, they have limited capacity to equal Iran’s drops.
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Number of American active oil rigs went down for a second week in a row. Therefore, slowdown in American oil production may be another reason for bullish market sentiment.
A combined oil production increase in Saudi Araba, Russia and US has totalled almost 2.5 mbpd. At the same time output has decreased in Venezuela, Angola and Iran by 1 mbpd. Source: Bloomberg, XTB Research
Bears camp:
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Saudi Arabia declared increased oil production in October and November despite OPEC’s countries reluctance. It is supposed that Saudi Arabia’s statement may be a result of Washington-Riyadh talks before the November’s elections for the US Congress.
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There are planned maintenances of refineries in the United States hence it could reduce demand for this commodity. As a result of this oil inventories could rebound to higher levels.
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There is seasonality on the oil market - in the winter season, oil price usually goes down.
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Trump’s sanctions were announced some time ago - markets had time to adjust
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Given that US elections will take place soon, President Trump could decide to release strategic American oil reserves to lower prices
Brent oil (OIL) prices have broken all the major resistances - the next barrier is at $89. Source: xStation5
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