Will Oil Come Under Further Pressure?

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Includes: BNO, CUT, DBO, DNO, DTO, DWT, OIL, OILK, OILX, OLEM, OLO, SCO, SZO, UCO, USL, USO
by: Gaurav Agnihotri

Summary

Oil went down by almost 2% on Monday, as rising U.S dollar and high U.S crude oil production weighed in on oil prices.

U.S shale production is all set to increase to its highest levels in five months.

OPEC compliance good, but non-OPEC members involved in the deal are lagging behind.

Oil went down by almost 2% on Monday, as rising U.S dollar and high U.S crude oil production weighed in on oil prices. On Tuesday, oil was slightly up by around 0.3% with WTI and Brent trading at $53.11 and $55.81 respectively at the time of writing this article. In my earlier article, I had stated that rising crude oil and gasoline glut along with rising U.S oil production will put downward pressure on oil prices. I had also stated that OPEC's compliance levels and U.S oil production will have maximum impact on oil prices. This is what is exactly happening now.

Has the market become range bound?

When oil prices (NYSEARCA:USO) (NYSEARCA:SCO) (NYSEARCA:BNO) (NYSEARCA:DBO) (NYSEARCA:OIL) (NYSEARCA:DTO) (NYSEARCA:DWT) (NYSEARCA:OLEM) (NYSEARCA:OLO) fell on Monday ( highest fall since mid- January) , many market insiders believed that this fall was due to rising U.S rig counts and increasing U.S oil production. "The good compliance rate of OPEC seems to be priced in. The U.S. rig count from Friday is weighing, the numbers support the shale comeback story," said an oil analyst from Landesbank Baden -Wuerttemberg. As per the U.S government data, U.S shale production is all set to increase to its highest levels in five months. This factor is definitely not good for oil prices, as a lot now depends upon the future OPEC-non OPEC compliance levels. "A floor is being formed by the production reduction agreed by OPEC and several non-OPEC oil producers. At the other end of the spectrum, a ceiling is being created by the stepped-up shale oil production in the U.S. OPEC producers want the market to believe they will stick to the agreed production freeze (NYSEARCA:CUT). But lessons from the past have made the market deeply suspicious," said ABN Amro bank in a statement. Investors must note that this bank has even reduced its price forecast (for Brent) from $55 to $50 per barrel for first half of 2017.

OPEC Compliance good, but non-OPEC members are lagging behind

The markets have acknowledged the fact that OPEC has achieved a better than expected compliance level, as far as its production cuts are concerned. Although OPEC is boasting a 90 percent plus compliance level, the same cannot be said about the other non-OPEC members who are also involved in the deal. As per the latest statement given by Kuwait's oil minister - Essam al- Marzouk, non - OPEC members (involved in the deal) are only complying with half of their agreed production cuts. As per the OPEC-non OPEC oil agreement, the group had agreed to reduce its oil production by around 1.8 million barrels per day for a period of six months starting from January 2017. Out of this total reduction, 11 non- OPEC oil members had agreed to reduce their oil production by 558,000 barrels per day during the first six months of 2017. And, out of the total 558,000 barrels per day, Russia had agreed to reduce its production by 300,000 barrels per day in a gradual manner. As on January 2017, Russia had only reduced 117,000 barrels per day- which was well below its compliance level.

Takeaway for investors

In my opinion, the OPEC-non OPEC compliance factor can only support oil prices in near future if non-OPEC members improve their compliance levels. Investors must note that OPEC had achieved a 90% plus compliance level after Saudi Arabia and Qatar reduced more than their agreed production quota. So, if this trend does not continue in near future and if non-OPEC members continue to produce above their agreed production levels, then oil prices will definitely come under more pressure. The upcoming technical committee meeting (to be held in Vienna on 21-22 February) will provide more details on compliance levels to the markets.

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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