It is clear that the OPEC deal to cut oil supply, which involves some of the biggest non-OPEC producers, is having an effect on oil prices. WTI has stayed above $50 USD per barrel for over a week. Nevertheless it is still too early to call it a success. The deal kicks in on January 2017, and until then oil still faces many headwinds. Ultimately, oil shipment tracking data during the first half of 2017 will give a clear indication of whether the deal was good or not.
Why isn’t current price a good indicator for the success of the OPEC deal?
Analysts must keep in mind that this deal will come into play after Saudi Arabia and Russia – the OPEC and non-OPEC biggest producers – hit an all-time oil production high. Cutting down from that amount is not difficult at all, especially when the cuts will come in the middle of the winter. Demand for oil now is peaking due to the winter, and current production levels can leave the oil glut intact until the end of the winter despite the January production cuts. High winter demand also means that current prices may be distorted.
The glut might subside
Despite the demand distortion, experts sustain that the oil glut might indeed disappear by the end of the second quarter in 2017. This prediction might not materialize. It will depend on how much the price of oil will advance before the Permian basin drillers start adding rigs at a higher pace. Ultimately, oil shipment data will be the key factor that will help markets determine whether or not this OPEC deal is a success or not. Even if the glut subsides, if prices are high enough and shale producers start drilling more, it will only be a matter of time until the glut swells back up.
Prices reflect speculation
From the data available at this time, any analyst can conclude that current prices are the result of the OPEC deal hype. Markets cannot know if the deal will work, yet they are rewarding the oil bulls. Additionally, if the Fed increases interest rates, oil prices will suffer. If Trump goes ahead with an aggressive expansion in fiscal spending, then the Fed will raise rates quicker and oil prices will suffer further. Therefore investors should be cautious about their positions in the oil market until enough supply data is available next year. Until that happens, anyone who invests in oil now based on the buzz around the OPEC deal, will be taking higher risks.