After spiking higher on Friday after reports that Saudi Arabia would offer to cut production in return for Iranian restraint, oil futures retreated on reports that Iranian agreement would be unlikely.
Choppy trading has again been a key feature in oil markets and there is unlikely to be a let-up in short-term volatility given the focus on OPEC talks next week.
WTI oil prices made fresh gains at the US open on Thursday with November futures peaking just below the $46.50 level.
Oil prices were supported by a generally weak dollar and hopes of some form of deal in Algeria next week to curb production levels.
There was a significant tone of profit taking from late in the US session and this trend continued in early Europe with lows close to $45.50.
There were further concerns surrounding underlying supply issues with expectations of further shipments out of Libya’s Ras Lanuf terminal, while there were also expectations of rising exports from Nigeria as rebel activity declined.
During the European morning session, there were source reports that Saudi Arabia had made a proposal to Iran ahead of next week’s informal meeting with Saudi Arabia willing to cut output if Iran agreed to cap production levels.
There was immediate upward pressure on crude with WTI spiking to highs around $46.40. Subsequently, there were reports from sources that Iranian officials would reject such a deal with Iran still committed to reaching pre-sanction production levels. There was no relief from volatility as oil prices dipped back to the $46.10 area following the Iranian reports.
There is still a very high degree of uncertainty surrounding OPEC intentions and the position will remain very fluid into the beginning of next week. OPEC and non-OPEC officials are due to hold informal talks on Wednesday September 28th, although the timetable could still be altered.
Comments from OPEC and non-OPEC members will continue to be watched very closely both on Friday and over the weekend.
There is likely to be further volatility in US trading on Friday and the potential for significant price gaps at the market open next week. Overall dollar trends will also continue to have a significant impact on underlying crude oil prices.
For many oil companies, the current downturn in oil is a back-breaker, but some have adapted to the falling prices and are fighting each day to survive and benefit from the higher oil prices that lay at the end of this dark tunnel.
In order to understand the prevailing glut, we have to go back more than a decade when investments into the oil and gas sector began to soar.
As seen in the chart above, the investments have multiplied from their lower levels to about $780 billion in 2014. The rise has been steady throughout, with the only dip coming in 2009. Such huge investments in a single decade resulted in the global oil supply increasing by 13 percent. During the same period, OPEC’s supply increased by 21.6 percent.
The massive amount of money being pumped into the oil and gas sector was due to the impressive gains in crude oil during that period. According to an analysis by the Zephirin group; between 2003 to 2013, WTI oil prices increased by 215.3 percent, whereas, Brent rallied by 276.3 percent.
However, demand failed to catch up with the breakneck speed at which oil was being pumped into the market. This ended with a massive oil glut, which has led to the worst oil crisis in decades.
There are a number of optimistic voices that point to a steep fall in investments from $780 billion to $450 billion in the past two years. They believe that soon the glut will shift to a deficit due to fewer oil discoveries and aging wells, which will boost prices higher.
“There is evidence that cuts in exploration activities have already resulted in a dramatic decline in new oil discoveries, dropping to levels not seen in the last 60 years,” said the IEA’s World Energy Investment 2016 report, reports The Telegraph.
However, a study by RBC Capital Markets expects new non-OPEC production of 2.16 million barrels a day to come online this year. In 2017, they expect an addition of 1.24 million barrels a day and for 2018, the figure is 1.58 million barrels a day. In 2019 and 2020, the additions are expected to subside to 680,000 barrels a day and 480,000 barrels a day respectively, reports The Financial Post.
With oil demand growth not looking very encouraging, the Zephirin Group’s Longdley Zephirin believes that the oil market “needs to collapse before it can improve,” reports Barron’s.
However, does it mean that the investors should shy away from the oil and gas stocks? Not really.
“Based on a simple calculation, HSBC estimates that by 2040, the world will need to find around 40 million barrels of oil per day to keep up with growing demand from emerging economies,” reports Business Insider.
This means that companies that manage to survive this downturn will have decades of high oil prices to benefit from. There are a number of companies that are cutting costs, innovating, building relationships with clients and hedging smartly. Such companies will be the ones to survive the downturn, emerging stronger to reap the benefits of high oil prices when the cycle turns again.
Investors should therefore be on the lookout to invest in companies that have a strong balance sheet and are offered at reasonable prices, because oil prices will not languish at the current depressed levels forever.
Please check back for new articles and updates at Commoditytrademantra.com
For More details on Trade & High Accuracy Trading Tips and ideas - Subscribe to our Trade Advisory Plans. : Moneyline