Oil market overview

Oil market overview

WTI and Brent futures climbed to their highest monthly levels as Saudi Arabia and non-OPEC member Russia rally support for a nine-month extension to the production cut deal signed by the majority of petroleum exporting nations. Signs that US supplies have started to ease added optimism that oil producers will eventually reach their goal of trimming global stockpiles and bring the balance in the global oil market. The US oil rig counts have been gradually picking up, but production isn’t rising as rapidly as would be expected and thereby provides a solid support to oil prices.

OPEC will hold its highly anticipated meeting on this Thursday, May 25, with nearly everyone so far predicting that members will agree to extend production cuts at least through the end of this year. Saudi Arabia and Russia claimed Monday in a joint statement they will “do whatever it takes” to reduce global oil inventories, pledging to extend the cuts by nine months. There is a remote probability that the agreement is extended with a more stringent cut. This would see prices rising from the current levels in the short-term, but in a longer-term, there is a high risk of a breakdown in the agreement to noncompliance. This would send prices lower.

Another factor that might contribute the oil prices’ drop/upsurge is the Iranian volumes of oil production. Incumbent President Hassan Rouhani won the election on last Friday. He suggested a great variety of reforms aiming at reviving the continuously weak economic growth of the country. He might encounter resistance in terms of the pace and shape of reforms he promulgates. In addition, there is a threat of disruption of the 2015 nuclear accord. Mr. Trump is unfriendly towards Iranian officials. Throughout his election campaign, he criticized Obama’s administration for forging a deal with Tehran. He is apt for doing great things with Sunni Arab leaders rather than Iranians. A sanctions snap-back could not only deter foreign investment in the Iranian energy but also curtail the country’s ability to sell oil abroad.  This would help oil prices to rise higher.

The additional factor that still puts a great pressure on the oil prices is oversupply from other key markets like Nigeria and Libya which are exempt from the oil production cut agreement.  If they manage to refurbish their petroleum producing industries this might derail the OPEC-led cut project.

Overall, in the short term, oil prices will likely continue their recent rally, especially, following the OPEC meeting. What happens with them afterward is still a big question. We may start making predictions as soon as we are able to assess the outcome of the Vienna meeting.

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