Thursday, 23 November 2017 | 07:21
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Political factors fuel oil bull run

Tuesday, 14 November 2017 | 16:00

Oil markets are entering an interesting phase. Prices have gained over 35 per cent from their early summer lows and recouping, in the process, all of their year-to-date losses, reaching levels last seen in July 2015. Many are describing this as ‘bull run.’ And they have a point.

Both the WTI and Brent broke their shackles further, last week. And, though things cooled out later in the week, yet, last Monday, WTI topped $57 a barrel mark. Brent too was seen trading up by more than $2 at $64.22 a barrel.

Three major events helped crude strengthen over the week.

The purge in Saudi Arabia and the possibility of political instability in the ‘oil kingdom’ amid growing tension between Tehran and Riyadh, were enough to make the markets itchy.

However, even before the political storm in the world’s largest crude exporter, and the associated aggressiveness on its part on the external front, two other factors were already in play — helping the markets to firm up.

Some reports were underlining in recent weeks that the US shale industry was running out of steam. And the argument carried some weight on the oil markets too, as, even with oil prices edging up, the rig count has consistently fallen in the US since August. Baker Hughes reported the US oil rig count for the week at 729 units – a decrease of 8 units from a week earlier. This indeed implies lower production down the road, however, one needs to underline here that the current rig number is still considerably above the 450 units in operation, the same time last year.

Signals coming from Opec and Russia, to extend the output cut arrangement well into the next year, also helped firm up the crude sentiments. Markets are also taking note of the discipline within Opec about output cuts and the resultant dissipating surplus hangover. Market equilibrium is definitely a good omen for the crude prices – and thanks to Opec, this seems achievable now.

Yet, is the ongoing bulk run sustainable? Not everyone seems optimistic.

Despite the drop in the number of US rig count, the US output continues to grow. The EIA is reporting that the US oil production jumped by a sizeable 67,000 bpd in the first week of November to 9.620 million bpd. “We’re on our way to set record crude oil production in 2018,” Andrew Lipow, president of Lipow Oil Associates in Houston, told Reuters.

Courtesy the higher prices, the US output definitely is carrying forward the momentum to grow still further. On the other hand, issues continue to plague the consumption scenario. As per reports, China’s oil imports fell to 7.3mbpd in October. This was a sharp decline from 9mbpd a month earlier.

These are disturbing signals for the markets.

And while, the ongoing battle for the throne in Riyadh has helped push up the oil markets in the short term, yet, Prince Mohammed bin Salman’s plan to diversify the country’s economy, away from oil, may not be good news for oil prices over the longer term, some are asserting.

“There may be a question mark over the role that conventional fossil fuels will play in the modernisation plan as he (Prince Mohammad bin Salman) is clearly focused on all things disruptive,” Helima Croft, the global head of commodity strategy at RBC Capital Markets was quoted as saying.

Dennis Gartman, who is often referred to as the commodities king, sees a monumental shift happening in oil markets — one that could bring crude back to historically low levels.

“You may get another dollar or 2 up front in the months ahead, just because of the confusion. But in the long run, this is terribly detrimental to crude oil prices,” the editor of the Gartman Letter told the CNBC.

“Over the weekend, it had barely moved, and I thought that was fascinating that crude oil didn’t move much at all,” Gartman said.

In fact instead of rising on the Saudi disorder, crude broke a three-day winning streak on Tuesday. It fell a quarter per cent to close at $57.20. And, since the Saudi Arabia news broke, crude is up just 2.4pc.

Gartman argues that as countries become less reliant on fossil fuels and technology improves in the United States to get hard-to-reach oil, the Saudis’ grip on the oil industry is slipping.

“Is Saudi Arabia losing its position of authority? Absolutely,” Gartman said. “The game has changed dramatically.

And indeed it has changed, none can argue.
Source: Dawn

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