Oil Prices Surge and Investors Become Bullish in Wake of OPEC Deal

With OPEC producers complying with a deal to reduce output to address the oil glut that drove prices down in 2016, the oil price has rebounded above $55 per barrel, and investors are optimistic about a bullish energy market.

According to a Reuters report today (Feb. 27), “Oil prices rose on Monday as investors showed record confidence in prices rising further, though gains were capped by the prospect of faster growth in U.S. oil production.”

U.S. oil exports are also up. In an article published Feb. 23, Bloomberg’s Sheela Tobben reported that “producers and traders shipped out 1.21 million barrels of crude a day from the U.S. in the week that ended February 17, the most in Energy Information Administration data going back to 1993.”

According to the report, domestic output was 9 million barrels per day in the week ending Feb. 17, and U.S. stockpiles swelled to record levels. What wasn’t being refined in the U.S. was being exported. “For now, U.S. crude is looking especially attractive to buyers in Asia,” the article states.

A CNBC article published Feb. 24 notes “oil prices have gone up in February, while energy stocks have gone down,” and investors “have been piling into crude futures.”

The article states that “factors supporting crude at the moment include OPEC’s production cut, a possible Saudi Aramco IPO, and seasonal demand starting to pick up in the United States. . .The downside factors include U.S. shale producers aggressively pumping, and the potential for a producer like Russia to not keep up with compliance with the OPEC deal.”

Also on Feb. 23, Bloomberg reported that “bizarre” trading was infiltrating markets in Asia that traditionally were supplied by OPEC. With cutbacks in OPEC output, countries in the Far East are turning to markets in Russia, western Canada, and elsewhere for the commodity.

Bloomberg quotes Harry Tchilinguirian, head of commodity-markets strategy at BNP Paribas SA, as saying, “Right now, these very-long haul arbitrages are opportunistic plays on freight and benchmark crude differentials to replace barrels lost to OPEC production restraint.”

The OPEC production cuts, Bloomberg notes, have “generally lifted oil prices worldwide, with crude trading higher than $50 a barrel this year.” But in an article published Feb. 24, Bloomberg’s Lisa Fleisher wrote that while oil prices have been hovering at about $56 per barrel, an ABN Amro Bank economist speculates that prices could fall to the $30 per barrel range.

A Feb. 26 analysis by Rakesh Upadhyay for Yahoo Finance is also cautious. Upadhyay states that “The production cuts by the OPEC members and Russia to balance the oversupplied crude oil market is the only reason for the current rally” in oil prices. The reductions have been offset, in part, by increased production by shale producers in the U.S. “Though the shale oil drillers haven’t been able to replace each barrel of oil production cut by OPEC, they have dented the bullish sentiment to a large extent,” Upadhyay wrote.

The Reuters article also quotes oil brokerage PVM’s Stephen Brennock, who warns, “With speculators increasing their bullish bets on U.S. crude to an all-time high, the risk of disappointment and subsequent downward spiral in prices has never been greater.”

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