Oil Below $50/bbl: Where is it Heading Next? - Petroleum Courses

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Sunday, October 30, 2016

Oil Below $50/bbl: Where is it Heading Next?

Oil Below $50/bbl: Where is it Heading 

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Crude oil prices fell below the market threshold of $50 per barrel this week as expected in our oil price forecast for this week which was published on Monday. The oil prices fall started on Monday but was intensified on Wednesday. Brent crude and WTI were down from around $51.50/bbl and $50.50 on Monday to $49.90/bbl and $49.20/bbl on Thursday respectively


The fall in oil prices this week was mainly driven by a growing doubt about OPEC oil deal after Iraq said on Monday that it wanted to be exempt from an OPEC production cut. Adding to the negative sentiments, the strengthening US has also put additional downward pressure on oil prices which resulted in oil prices breaking below the $50/bbl floor this week.
Despite the limited support that oil prices received from a rally in Wall Street shares and a small draw in crude inventories reported by the EIA on Wednesday, oil prices paired it’s gains shortly after these two events took place as doubts about OPEC production cut has been growing fast in the past few days.
Iraq’s comments on its intention not to be part of the OPEC oil deal has shifted the oil market sentiments from positive to negative. Prior to the Iraqi comment, oil traders and investors were trying to build a little bit of trust on OPEC and its proposed production cut deal which as OPEC said will be agreed upon during its November’s meeting. But now, Iraq’s negative comment not to be part of the oil deal is demolishing that fragile trust.
What is Next for Oil Prices?
Based on the current oil market sentiments, market data and news, the short-term outlook for oil prices appears to be very gloomy. Here are few factors that will impact oil prices negatively in the coming days and could extend the oil prices fall:
Doubt about OPEC oil deal. Even prior to Iraq’s comment, the oil market was still vigilant about OPEC oil deal and many believe it is nothing but an emotional game to keep oil prices from falling below $40/bbl. Now with Iraq asking to be exempt from participating in OPEC oil deal, which opens the floor for other members to follow its path, the OPEC oil deal becomes questionable, and the probability of its failure is increasing. As OPEC’s oil deal has been the factor that supported oil prices all the way from around $40/bbl is under doubt, oil prices may not sustain its current level. To know more about OPEC oil deal, and the probability of its success and failure, read this analysis.
Strengthening US dollar. The recent spikes in US dollar have contributed to the fall in oil prices this week. It should be clear that the greenback will continue to impact oil prices negatively in the coming weeks. There is a high probability of a rate hike taking place this year. Indeed, the rate hike will not take place in the U.S. Fed meeting that will be held on November 2 next week, however this meeting will be a placeholder which will support the dollar and will increase the probability of a rate hike in Feds’ December meeting. Table 1: Probability of Rate Hikes across Upcoming Fed Meetings Probability of Rate Hikes across Upcoming Fed Meetings


US rig count and oil production. This is another important factor which will impact oil prices negatively this week and in the coming weeks. US rig count and oil production is currently increasing now. The longer oil prices stay above $50/bbl, the more increases we will see. As US rig count increase and more drilling activities take place, US oil production will increase. In a market that is struggling to balance supply and demand, the last thing everyone wants to see is an increase in oil supply. This factor will force oil prices to fall below $50/bbl in the coming weeks. To better understand why the current increase in US rig count and oil production is a threat to oil prices at $50/bbl

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