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Sentiment is strong for oil despite daily volatility

The prospect of the freeze in OPEC production is gaining more credibility, on Friday, Brent crude was priced above US$51.
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The market seems content enough

Sentiment remains strong on the oil markets despite continued volatility on a daily basis.

The prospect of the freeze in OPEC production is gaining more credibility and in early trading on Friday, Brent crude was priced above US$51 with WTI still holding above $US$50 a barrel.

With five weeks to go before the final OPEC meeting of the year, investors and traders are banking on a firm OPEC decision to curtail production.

The market seems content enough with the fact that production figures are high and this OPEC gesture is being seen as adding a sense of stability to the market.

We saw some profit taking this week after a mid-week rally, but a price above US$50 a barrel has given the industry a breather.

WTI has been healthier this week than in the last 15 months, helped of course by a surprise drawdown in US crude stocks of 5.2 million barrels to 468.7 million barrels.

Some technical analysts are becoming more optimistic, with hints of a possible US$60 a barrel by the end of the year; the general consensus being we can expect a positive run in the coming weeks.

Fundamentals are improving but remain weak

The fundamentals are improving but still remain weak, with supply greater than demand but the prospect of a freeze on production is being welcomed.

Ministers are keen to be seen to be continuing the conversation as hopes of a more than half a million barrel a day production cut would calm fears, especially if Russia was to join forces with OPEC members.

Speaking at the Oil and Money conference in London this week, the Saudi Arabian energy minister Khalid al-Falih said the industry was now “at the end of a considerable downturn,” after the lack of investment in the past two years.

He said that an estimated US$24 trillion needs to be spent on reviving the oil sector if global energy demand till 2020 is to be satisfied and he even warned of a shortage if investment was not committed.

He also reminded his non-OPEC peers that “their contributions to stabilizing the market are every bit as critical as those by OPEC.”

The Russian Energy Minister, Alexander Novak told reporters he was supportive of bringing stability to the market and he would be meeting Mr al-Falih to continue talks.

While the Saudis may have a handle on their own and an influence on some OPEC production, the prospect of a stronger oil price will have many of the unconventional shale players eager to get back in business.

More efficient shale producers can be profitable below US$50

The CEO of ExxonMobil, Rex Tillerson told the London conference that many of the more efficient US shale players could be profitable below US$50 a barrel.

With North America effectively being the global swing producer, Tillerson said there could be “enormous spare capacity in the system” at a stronger price and he cautioned his peer energy players to “never bet against the creativity and tenacity of our industry.”

The CEO of the French oil company Total, Patrick Pouyanne agreed that the US shale players had demonstrated resilience but he cautioned that the drop in investment from US$700 billion to US$400 billion in the past two years could mean a shortfall of 5 to 10 million barrels a day by the end of the decade. 

He also reminded industry players of the ongoing percent natural decline of fields, estimated at about 5 percent.

The World Bank raised its 2017 oil price forecast this week to US$55 a barrel and said it expects all energy prices, including gas and coal to jump by 25 percent next year.

In its quarterly Commodity Markets Outlook publication, it paid particular attention to OPEC’s proposed output freeze and said while the expectation is for higher commodity prices, there is still “considerable uncertainty around the outlook as we await the details and the implementation of the OPEC agreement, which, if carried through, will undoubtedly impact oil markets.”

A stronger oil price and a stable market still remain top of the wish list for all oil producers. 

A more buoyant outlook certainly helps keep sentiment positive, but more decisive action from the key producers will be needed to help encourage investment and move the market forward.

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