A Few Reasons For Further Appreciation In Oil Prices

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Includes: BNO, DBO, DNO, DTO, DWTI, OIL, OLEM, OLO, SCO, SZO, UCO, USL, USO, UWTI
by: Societe Financiers

Summary

The recent statistical data on oil are neutral: global demand is slowly catching up to supply.

The probability of a positive result of the upcoming Doha meeting is high due to some economic and internal factors affecting non-OPEC countries.

Undoubtedly, politics is playing a key role in the global oil market, and this factor should never be underestimated. In some countries, politics goes before economy.

The situation is quite complex.

In the present time, oil prices fluctuate around $ 40 per barrel, as a number of fundamental factors raise doubts regarding further reductions in crude production. On the basis of preliminary data on oil production indicators as of January 2016, global supply has increased by 0.03 mb/d since the start of the meltdown on the commodities market. Thus, the average value of oil supply totaled 95.64 mb/d. Due to the gradual reduction of investment attractiveness in emerging economies (Non-OPEC), their production has decreased by 0.10 mb/d. The main reason was the negative PMI for countries with the highest GDP. As a consequence, these countries reduced oil consumption in Q4 2015. The share of oil produced by OPEC countries has risen to 33.8% of total global oil production, indicating a significant reduction in production in non-OPEC countries. The reason for that was the removal of limitations on Iranian oil production.

(Source: OPEC)

OPEC predicts global oil consumption will overtake the supply in Q3 2016. This optimism is mainly dependent on the confidence in the success of the monetary policy of negative interest rates. I think the recovery in global production will begin from countries with emerging economies, as their inflation is higher than in countries with developed economies, helping to attract foreign direct investments.

Click to enlarge

(Source: OPEC)

All OPEC members, as well as other oil-producing countries, are waiting for April 17, 2016, the date for the next Doha meeting, which should determine oil price behavior for the foreseeable future.

One of the most important nuances in understanding causal relationships in the oil market is that the economic systems of the major oil producing countries are founded on the exports of crude oil: that is, they are focused on resource exports. In these countries, the services sector is often underdeveloped; production is not diversified and, most importantly, the social and legal institutions are weaker than in other countries. The latter does not allow these countries to fully develop their economic potential or massively attract foreign direct investment. The lack of economic stability often causes civil unrest in such countries. Therefore, at the meeting in Doha, all parties, including non-OPEC producers, are interested in reaching agreements that contribute to the rise in oil prices.

Iranian government's commitment to its pursuit of a solid market share on the oil market is a major obstacle to the reduction of global oil production. Due to increasing risks of deterioration of the political and economic situation in Iraq, as well as due to the constant terrorist attacks, the government has increased production to 4.55 million barrels a day. Iran's complex relationship with Saudi Arabia may undermine the possibility of a favorable outcome of the meeting. However, Russia is a partner of Saudi Arabia and an ally of Iran. Iran, in its turn, has an enormous influence on Iraq, due to the fact that Iran is the main importer of Iraq's basic goods. These relationships increase the likelihood of reaching agreements aimed at limiting global oil production.

Conclusion

Thus, the weak growth of the global economy, particularly vivid in countries that depend on commodities' exports, contributes to the unification of interests of the Doha meeting's participants. We believe that investors can expect arrangements that will cause global oil supply to converge with demand in the mid-term.

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