Why Oil May Stay Between $53-$58 During The First Half Of 2017

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Summary

The latest production cut made by Saudi Arabia has shown that the country is serious about the oil deal.

Other OPEC members like Kuwait, Venezuela and Iraq are also sticking to their commitments on production cuts.

Russia will reduce its oil production in a phased manner in the first half of 2017.

Demand for oil is expected to increase.

Oil ended up higher by almost 0.5% on the first Friday of 2017, with WTI and Brent trading at $53.99 and $57.1 respectively at the time of writing this article. In my earlier article, I had stated that oil prices will continue to swing and remain volatile in short term, as it will take a few more weeks for the markets to analyze the actual supply impact of the OPEC-non OPEC oil deal. "There's a lot of volatility, or at least changes in direction. People think the long-term trend is up, but after a gain of a few dollars, they take profit", said Hans Van Cleef of ABN Amro bank. In my opinion, investors are still skeptical regarding the upcoming OPEC, non-OPEC production cuts in spite of some early positive signs. This week, Saudi Arabia declared that it has reduced its January oil production by around 486,000 barrels per day. Saudi Arabia had earlier declared that it was ready to go beyond its commitment on output cuts (if required) in a substantial way. The latest production cut made by Saudi Arabia has not only supported oil prices (NYSEARCA:USO), but it has shown that the country is serious about its commitment towards the oil deal.

If Saudi Arabia complies, then Russia follows

In a meeting that was held on December 10 between OPEC and non-OPEC members, it was decided that non-OPEC producers will reduce their oil production by 558,000 barrels per day. Out of this total production cut, Russia will alone reduce around 300,000 barrels per day. I had stated in my earlier article that Russia will support this oil deal only if OPEC sticks to its commitment on production cuts. On Friday, Kuwaiti officials declared that even they have reduced their country's January- oil production to around 2.7 million barrels per day. This means that OPEC members like Saudi Arabia, Kuwait, Venezuela and Iraq are already sticking to their commitments on production cuts. At 11.21 million barrels a day in December 2016, Russia produced oil at record levels last year. With the latest OPEC compliance, I am confident that the Russians will indeed reduce their oil production by 300,000 (approximate) barrels in the first half of 2017. However, this production cut may occur in a phased manner. "Russian producers have significantly increased drilling over 2016 in efforts to stem field decline. While little information on the duration of production cuts has been made public, provisionally we assume that output will rise gradually again during the second half of 2017", said an official from the International Energy Agency.

Conclusion

In my opinion, the global crude oil supply will tighten during the first half of 2017, because other OPEC members like the UAE and non-OPEC members like Russia may reduce their oil production in a gradual manner in order to honour their deal. Besides this, the demand for oil will also go up when the U.S. refineries increase their production for the driving season. Even demand for oil in the Middle East will increase during summers. Looking at these factors, oil prices will remain on the upside during the first half of 2017. My take would be $53-$58 a barrel. Investors must take note of this.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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