After OPEC announced its decision to increase production on last Friday, oil prices jumped due to the uncertainty related with the vagueness of the deal itself and the true production capacity of some OPEC members. After hitting the 80$ mark back in May, it seems that the brent is currently trading at a bearish channel. What is next for the price of oil? Let´s have a look at the arguments presented by the bulls and the bears.
The bullish case
Venezuela´s situation
The production of the Latin American country has been decreasing since the economy entered a recession. High inflation has led to a massive depreciation of its currency, which led to a massive increase of its external debt. The economy has contracted more than 10% in the last three years and the energy sector was naturally one of the victims. Production was reduced by 350 000 - 500 000 barrels this year alone and it is quickly heading down towards the psychologically important level of 1 million bdp, after averaging more than 2 million bdp back in 2016.
US sanctions on Iran
Donald Trump decided to impose new sanctions on the Muslim country, after deciding that he would not extend the nuclear deal between the United States and Iran. There is not a consensus among analysts, but is estimated that 500 000 bpd might be withdrawn from the market.
World growth
Looking ahead to 2019, the IEA thinks oil demand growth will expand by 1.4 million bdp, which should provide support to the oil price in the next year. A global growth forecast of IMF of 3.9% also strengthens the idea that global oil demand should increase significantly this year.
The bearish case
US shale production
The United States are currently producing almost 10.9 million bdp, making them the second world´s biggest producer after only Russia. Three years ago, the biggest world economy was producing about 7.5 million bdp and the EIA predicts that American production can rise to 11.8 million bdp in 2018.
The US dollar strengthening
The FED has raised interest rates already this year and it is expected to do it again, at least two times in 2018. With European interest rates staying steady, we may see some strength to the dollar in the following months, which will increase the price of oil for consumers that hold other currencies.
The threat of a global trade war
Beijing and Washington have been raising the tone of their accusations of one to the other the last couple weeks, after Donald Trump imposing tariffs worth of 50 billion dollars on Chinese goods. Beijing answered back with tariffs worth of the same value, confirming a commercial conflict between the two powerhouses that will undermine global growth. Rising tensions between the United States and its allies over the tariffs on aluminium and steel may also present a threat to global trade and to global growth.
With the market volatility very high at the moment and an all time speculative net long position in the American market, the market sentiment seems to be bullish, but the repeated increase in US production and the growing conflict between the US and its allies in terms of international trade, indicates that the only thing that we can be assure of is that the oil market is going to be the one of the most interesting markets to follow in the next couple of months.
About the Author:
Francisco Quadrio Monteiro has 3 years of experience with markets and active trade. He is Market Analyst at TeleTrade expertise in several topics such as FOREX, Commodities and Risk Management. Francisco has a B.S. from the Nova SBE – TOP Portuguese Business School according to Financial Times. He regularly wrote about topics such as Cambial Market, Commodities, Stocks and Cryptocurrencies.
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