Global oil prices jumped two days ago to its highest level since early July 2015. Brent crude futures rose to the nearest $ 1.70 to $ 63.75 a barrel, or 2.7%, while light US crude futures rose $ 1.26 to $ 56.85 a barrel equivalent to 2.23%.
Prices continue to rise for the fifth month respectively, up 35% from the lowest level recorded in mid-June of 2017. The West Texas WTI is close to its highest level this year at $ 56 a barrel, up 27% from the same period of the last year.
The rise comes in response to the Organization of the Petroleum Exporting Countries’ (OPEC) goals of falling production, improving global demand, declining inventories, the production of shale oil varies and rising geopolitical risks.
A report by the research and studies department at the National Bank of Kuwait said that the reduction of production between OPEC countries and some countries outside Russia led by Russia contributed to reducing the abundance of production, supply and stock in the market. Some producing countries such as Saudi Arabia and Russia played an important role in influencing general opinion where it has linked the marked decline in commercial stock to its efforts.
The report pointed out that the decline in oil and product inventories since the highest level in July 2016 was a slow pace, falling to 3.051 billion barrels in the last August , with rate 2.9% (90 million barrels) of the highest level, which reached 3.104 billion barrels 13 months ago, and the level of stocks in August away from the average five-year of 2.854 billion barrels, by 170 million barrels, but this reflects the increase in the level of target (which is a moving medium).
OPEC Secretary-General Mohamed Barkando said that the balance of the market is coming soon, and that the OPEC countries and beyond deserve to be praised for achieving their target through an unprecedented commitment. OPEC announced at the meeting of the Joint Ministerial Committee that the commitment to the reduction has reached a historic rate of 120% (September) 2016, referring to the production of the Organization in September amounted to 32.75 million barrels per day, an increase of 90 thousand barrels per day from the data of August, according to secondary sources of the Organization.
On the other hand, the countries that signed the reduction agreement showed its desire to extend the reduction until the end of next year. The group will hold its meeting in Vienna on 30/11/2017 to discuss developments and discuss the possibility of extending the reduction period, in addition to the development of an appropriate strategy to end it and avoid the return of much production after the suspension of the agreement. On the other hand, the shale oil production situation will benefit from continued reduction.
Sources added that the four-month recovery clearly shows that markets have begun to adjust, and in the futures market, the reverse curve of Brent futures prices -in which has the price of delivery rate higher than prices of futures for the benefit of OPEC – in support of available prices and has helped to reduce storage of crude oil . As oil prices fall, the role of hedge is reduced exploited by shale oil production companies effectively to maintain returns during the period of lower oil prices. OPEC must not back down from its commitment, as the slightest change in commitment could lead to an oversupply in the market. Speculative operations have rebounded sharply in hedhe funds with the doubling of buying and selling positions. Brent’s buying positions have accumulated at a minimum of $ 34 billion. This is historical level, and may be reduced with any inappropriate move by OPEC. ”
The increase in demand for oil is one of the main reasons for this increase. Global Brent crude reached $ 60.75 per barrel, up 13 cents, or 0.2% above the settlement price.
The price of futures contracts is increasing due to the decision of the Organization of the Petroleum Exporting Countries (OPEC) and some producers outside of it, including Russia, to cut production by 1.8 million barrels per day to reduce the supply in the market. The growth of global demand is witnessing an unexpected strength this year may exceed the level of production to a large extent at the end of this year. , .
The International Energy Agency predicted the demand growth in 2017 by about 1.6 million barrels per day (1.6%), meaning that there is a difference between it and the expected global production growth of 1.3 million barrels, if production remains at current levels. By the end of the year, inventories could drop by 130 million barrels to equal 0.4 million bpd.
The report of the International Monetary Fund confirmed that the increase in demand for oil, evidence of the improvement of the global economy, and the rise of the expectations of growth of the Chinese economy has contributed in support of the review of global GDP growth, where China accounts for 12% of global demand for oil, with the liquefied petroleum gas and gasoline and Diesel are the most refined product list affecting demand movement.
The IMF expects the situation to be different in 2018, with production outpacing demand growth. In the same context, the International Energy Agency expects demand growth to reach 1.4 million barrels per day and non-OPEC production growth to 1.5 million bpd. It is expected that America will contribute significantly to the production of non-OPEC countries by 1.1 million barrels per day.
This follows the 2017 increase of 0.47 million bpd. US production appears to have begun to recover to pre-Hurricane levels of about 9.5 million bpd.
Shale Oil production is likely to decline in early 2018 as drilling rigs have declined since June. As they have decreased in the past ten weeks. There is usually a delay of six months until the production is adapted to the change in drilling data.
If the growth of shale oil production in 2018 comes as expected by the International Energy Agency, it is possible that the stock will accumulate rather than retreat, and this may again delay the market equilibrium that has long been targeted by OPEC, which explains the Group’s desire to extend production cuts until the end of the Next year.
International risks helped to improve oil prices
With the continued geopolitical tensions between Saudi Arabia and Iran, and after the Houthis launched a ballistic missile from Yemen on the capital Riyadh, which Saudi Arabia considered a direct military aggression by the Iranian regime in the conflict in Yemen and the possibility of leading to the tension to a new war in the region between Iran and Saudi Arabia.
The geopolitical tensions between them have led to the expansion of oil prices in its gains to the highest level in two and a half years, because Saudi Arabia is the largest oil exporter in the world.
There are fears in the oil markets about the political stability inside the Kingdom, what it is doing to combat corruption, and the situation in Libya, which contributed to the rise in prices because of the decline in production to 900 thousand barrels per day because of the unrest in the country, in addition to the continuing unrest in OPEC member Venezuela, the largest oil reserves in the world, whose production has decreased to below 2 million barrels per day.
The situation in Iraq, as the markets became concerned about the flow of oil from Baghdad, as a compromise against the Kurdistan Regional Government, after the referendum on the independence of the Kurdistan region, which angered Iran, Turkey, which threatened to close the main pipeline to transport Kurdish oil through its territory to global markets (And the Iraqi federal oil also from Kirkuk oil fields).
Reports indicate that exports through oil pipelines from Iraq’s northern fields have declined by 60 percent over the past month, from an average of 600,000 bpd to 240,000.
There are fears on the world market after US President Donald Trump refused to ratify the Iranian nuclear deal, known as the Joint Comprehensive Action Plan, and gave Congress the decision to reject the agreement or re-impose economic sanctions on Tehran in two months.
Among the factors that supported oil prices, US energy companies cut the number of working oil rigs, while the recovery of 14-month drilling activities stopped as companies cut back on spending plans when crude prices fell.
However, analysts pointed out that Saudi Arabia’s oil policy would not change, but that did not prevent fears that it would seep into investors, causing prices to rise.
The inverse relationship between oil prices and gold prices
The rise in global oil prices reflected negatively on the price of gold as it recorded a decline in gold futures, amid the rise of the US dollar index to its highest level since July 20, 2016, and according to the inverse relationship between them following developments and economic data and draws the attention of the continuation of the talk of the member of the Federal Open Market committee Randall Quarles and Federal governor Janet Yellen.
Gold futures for December fell by 0.37% to currently trade at $ 1,276.80 per ounce from the opening at $ 1,281.60 an ounce, amid the dollar index rose 0.31% to levels 95.05 compared to the opening at 94.76.
The Index of employment opportunities and Global labor Turnover were steady for September, at about 6.09 million jobs, unchanged unlike the expectations which indicated to a labor turnover of about 5.98 million jobs.
Financial markets are watching closely events, and the talk of Federal Open Market Committee (FOMC) Chairman Randall Quarles who will speak at the upcoming annual information exchange conference in New York. Investors will watch Federal Reserve bank Governor Janet Yellen, whose mandate expires in February,
The Federal Reserve confirms tightening monetary policy and raising interest rates a third time this year by its meeting in the next December as well as continuing to achieve global stock indices, led by America to record levels, and this weighs the performance of gold prices with the shift of liquidity to high-risk markets and the high revenue and abandonment of safe havens.
Shatha Khalil *
Researcher in Economic Unit
Rawabet Center for Research and Strategic Studies