Crude Oil to hit $60 a barrel? - Will Russia Curb Exports
From June 2017 we have seen Crude Oil steadily climb and transform into a respective bull market, as investor confidence continues to strengthen in the commodity. The OPEC (Organisation of the Petroleum Exporting Countries) group have a scheduled meeting at their headquarters in Vienna on the 30th, to discuss the possible extension to curb outputs for certain members, and non-member countries.
It’s been reported that ALL of the OPEC members have agreed to extend their oil production cuts until the end of 2018, which is a huge commitment for countries like Russia as Crude Oil represents 26% of its exports, and is worth a massive $73 billion, the largest % of all it’s exports. If Russia were to follow suit and agree to curb the amount of oil that is being produced, it would see Russia’s GDP substantially decreased.
Moreover, Russia and OPEC partner countries have been rather compliant with regarding the previous demands to cut production to 1.8 million barrels per day. This further compliance was sparked because the initial six months of cutting wasn’t enough to eliminate the oversupply that had built up, thus driving the price of crude oil lower.
You can see from the chart above, the chatter that’s emerging from many media sources, the expectation for more cuts has been priced into the market. It’s pretty obvious if you know what to look for. If you don’t allow me to explain. The steady climb in price has been an indication that speculators are receiving the news of possible cuts in production in a positive way, and therefore drive the price up.
From the image below, you will notice that the number of drawdowns exceeds the number of builds in crude oil inventories since September. This is just one aspect that adds to the price gains that we have seen in the commodity.
Not only that, but the COT Report (Commitment of Traders) also shows the number of long positions in crude oil have increased. It’s been widely accepted that an extension in cuts will be brought to the table, and so hedge funds and investment banks have been keen to capitalise on the inevitable rise in prices over the next few months.
When you use the basic law of Supply & Demand, it states that when you have an asset that has too much supply, then the price of said asset drops in value, because the market is saturated with it. However, if you turn the tables and have an asset that is in strong demand, but there isn’t much supply, the price of that asset rises.
Now if you apply this law to the inevitable cuts that have been proposed, and each country agrees to produce less barrels of crude oil of an extended period of time, what is going to do to the price?
A question which is on a lot of people’s minds at the moment, is whether the agreement between the countries will happen. However, I don’t think people should be focusing on whether it will happen (the evidence suggests it will, from a fundamental aspect, NOT a technical aspect). I think the real question people should be asking, is how long these cuts are going to last for, because this will determine the future price for crude oil and where we can expect to rise to.