Last week, crude oil prices spiked on Monday following a positive news that the Organization of Petroleum Exporting Countries (OPEC) is close to making the oil output cut deal a success. The support to oil prices mainly came from the news that Iraq agreed to support OPEC’s oil deal and shoulder part of the burden of the oil output deal. Iraqi minister said that his country will offer OPEC three new proposals and all the proposals will be in line with OPEC policy and will help strengthen the unity of the group.
Following the news, oil prices increased by more than 4 percent on Monday. Brent crude and WTI were up by more than 4 percent to $49/bbl and $48/bbl respectively. Despite this positive news, oil prices didn’t continue the upward movement and barely held the gains it made on Monday. This was in major part due to the fact that the oil market is still cautious about overoptimism with regards to OPEC’s oil deal and how things ended badly every time the oil market trust that OPEC may agree on any deal to freeze or cut its oil output.
On Tuesday, oil prices paired some of its gains and remained around that levels until the end of the week when prices fell on Friday after Saudi Arabia told OPEC’s members it will not attend talks with non-OPEC producers on Monday as the country want to focus on making sure all OPEC’s members are on-board to limit oil output. Other oil market parameters didn’t have much effect on oil prices last week as the focus was mainly on OPEC oil deal and any comments related to oil output cut deal.
*Last Week Oil Market Data and This Week Oil Price Direction*
Last week oil market data point toward a negative oil price direction for this week, however the impact of these data will be diminished by the news of OPEC’s oil deal as it dominates the oil market this week. Despite a small decline in U.S. crude oil inventories of around 1.3 million barrel reported by the EIA, U.S. crude oil production and rig count data showed an increase in the oil production and rig count in the week before. U.S. crude oil production increased by 9,000 bbl/day to 8,690,000 barrel per day. U.S. rig count was also up by 5 rigs to 593 according to Baker Hughes Rig Count service.
The current upward trend both in U.S. crude oil production and rig count gives us an important insight into what will happen if OPEC agrees to limit oil output in its meeting this coming Wednesday. Once OPEC agrees to limit its oil output, oil prices may spike to somewhere around $55 per barrel. And consequently, U.S. oil producers will aggressively ramp up their drilling activities and increase oil output.
Not only that, the upward trend both in U.S. crude oil production and rig count also tells us a lot about why OPEC may not reach a deal this week. It is unbelievable that OPEC’s members -led by Saudi Arabia who started the market share war- will cut their oil output to stabilize and risk losing their market share to non-OPEC oil producers such as U.S. shale oil producers who will continue pumping. Because once the deal is on, OPEC’s members will not be allowed to increase their oil output, yet non-OPEC producers are free to do so.
*Oil Price Forecast for This Week*
The overall oil price direction for this week is extremely gloomy, but at least we know who is in control. The oil prices direction for this week and in the short to medium term is dependent on the outcomes of OPEC meeting this Wednesday. Oil market data and news are irrelevant at this point. This means, oil prices will fluctuate up and down depending on the comments of OPEC’s members which may or may not support the oil output deal. Oil prices will also be influenced by the current emotions of oil traders and investors who are worried that OPEC may not reach a deal.
Oil prices are set to remain somewhere around the levels it fell to last Friday. Favorable movement will be toward the upside as OPEC members will continue to provide positive comments to support oil prices util their meeting takes place in Vienna this Wednesday. However, there will also be a considerable pressure on oil prices due to growing concerns in the oil market that OPEC may not reach a deal. Therefore, on the first two-days of trading, oil prices may fluctuate up and down between $45/bbl and $47/bbl by 1 to 2 percent.
Later on Wednesday, the oil price direction will be determined by the outcomes of OPEC meeting. We don’t know what the cartel will agree upon on Wednesday. However, we do know the options available to OPEC. To find out more about the options available for OPEC in its meeting this week, their consequences on the oil market and how these options will influence oil prices, read our recent analysis; OPEC Meeting; Available Options and Their Consequences.
Remark: The expectation of oil prices’ direction in this commentary are based on the oil market data and news up until the time of writing this commentary. As the week starts, new data and news are reported and could influence oil prices differently. Therefore, the direction of oil prices cloud be different from what was expected here. It is important to stay updated with oil market data and events as they occur.