Crude Oil Declines on Strong Dollar but 2017 Outlook is Bright
Crude oil prices recorded the second day of losses this week when it declined on Thursday in response to a stronger U.S. dollar. The U.S. dollar is enjoying bullish tailwinds in the forex markets after the U.S. Federal Reserve raised Interest rates. The strong dollar however makes crude oil more expensive for buyers who hold other currencies other than the USD because oil is priced and sold in USD.
Hence, crude oil prices fell on Thursday as traders became worried that the stronger dollar might weaken the demand for oil. As at market close on Thursday, U.S. crude futures for January lost $0.14 to settle at $50.09 per barrel. The Brent also had a lukewarm session as it ended the session at $54.02 per barrel.
Oil recovers today as OPEC vows to stand by deal to cut output
Crude oil traders seem to be putting the weakness recorded on Thursday behind them as they move to push oil prices higher today. This morning, oil prices started recording gains in Europe as the Brent Crude Futures gained $0.09 to $54.11 per barrel at 07:29GMT. The U.S. West Texas Intermediate Crude also gained a massive $0.18 to $51.08 per barrel.
On the of main reasons behind the recovery in oil this morning is that Middle East producers have started making it clear to customers that they tend to abide by the recent OPEC deal to cut oil output. Market rumors suggest that Saudi Arabia, Abu Dhabi, and Kuwait among others have started notifying their buyers of that they would reduce their output starting from January 17 in line with the OPEC deal.
Goldman Sachs energy markets analysts observe that “These greater projected cuts and our strong demand growth forecast lead us to forecast a normalization in inventories and backwardation across the forward curve by next summer.”
Non-OPEC members express support for output cut
The second reason behind the recovery in oil prices is the fact that some 11-non OPEC members have agreed to join OPEC in cutting their outputs as well. Russia is leading the coalition of non-OPEC members including Mexico, Azerbaijan, and Kazakhstan among others to cut 558,000 barrels per day. The Russian energy minister, Alexander Novak observes that “this is truly a historic event… It’s the first time so many oil countries from different parts of the world gathered in one room to accomplish what we have done.”
Analysts submit that the alliance between OPEC and non-OPEC members to cut their output will made the output cuts more effective. The purpose of the deal to cut output wouldn’t stand if OPEC tried to cut its output while non-OPEC members were pumping out more barrels of crude oil.
Now that OPEC has the support of 11 non-OPEC members to cut output, traders expect the deal to cut output to be effective in reducing global supply in order to boost oil prices. Going forward, it is safe to assume that oil prices won’t show marked increase until the production cuts go into effect by the end of January 2017.
However, Goldman Sachs believes that oil prices could made decent gains once there’s proof of the output cuts. The bank expects the WTI to rise to 57.5 per barrel by the second quarter of 2017 and it expects the Brent to trade between $55 and $60 per barrel after the first half of 2017.