After extending their downward slide, both crude oil benchmarks returned to near unchanged in early trading on Friday. WTI crude remained stuck just below $35 per barrel, while Brent crude was a few cents above $37/bbl. By later in the morning, both price benchmarks had turned slightly positive.
Among other factors influencing the crude markets is the persistent glut in the global supply of the gooey “black gold.”
Overall, oil prices remain low as the commodity is firmly in a bear market. For perspective, we are only about 18 months removed from $100+ per-barrel crude prices. There seems to be no end to the slump in sight, and a variety of recent developments are making the outlook appear even dimmer.
One of the areas of change in the crude oil landscape is the diminishing dominance of OPEC, the Organization of Petroleum Exporting Countries. Once so powerful it could cause a global oil crisis by withholding its supply or price-gouging, OPEC got zero response when it publicly asked non-member countries to cut their oil production in order to help lift prices. In fact, the group had to instead go the opposite direction, abandoning any production limits for its members. The OPEC countries are now free to pump as much oil as possible. Some speculate that their strategy now is to push prices so low that it forces some of their overseas competitors out of business.
Amid these shifts to its strategy, OPEC isn’t optimistic about the future price environment. According to market analyst James Wyckoff, “The OPEC oil cartel on Friday said crude oil prices will remain below $100 a barrel for the long term. The cartel predicted $70 a barrel by 2020” and further predicted that we will only see $95/bbl again by 2040.
The fact that prices are so low, however, means that even a modest recovery in prices next year would be somewhat large proportionally, especially compared to year-on-year comparisons between 2016 and 2015. This may have an outsized effect on inflation, even if prices only recover to, say, $45/bbl.
Crude Oil Supply Glut
Aside from OPEC’s pivot and the U.S. finally opening up its own oil export business after 40 years of a congressional ban on such sales, the real culprit in sinking crude prices is simply oversupply. Above any other factor, the nearly 7-year lows for oil prices is due to the worsening supply glut. It’s so bad that storage is becoming an imminent problem. A Goldman Sachs report suggested that as oil tankers fill to full capacity, certain producers will have to halt production altogether. They would literally have no place to store it!
According to the International Energy Agency (IEA), stockpiles of crude oil in the U.S. have surged to over 490 million barrels, which is the highest level for this time of year since 1930—an 85-year high. Meanwhile, the USD has risen 10% against its peers on the year, which generally isn’t helpful for crude, but is some consolation for the petrodollar.
Narrow Technical Levels
While there is support for crude (traded in New York) at $34.15/bbl, there are strong resistance levels successively at $35.60/bbl, $36.05/bbl, and $36.60/bbl. If nothing else, this indicates that it will be difficult for prices to string together much upward momentum.
The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.