Commodities Market Review: OPEC Failed to Contain the Rising Oil Price

Global Oil Price Hit Near 3-Year High

The oil price has stayed low since December 2014 when robust global production significantly exceeded demand. However, on June 29, WTI (West Texas Intermediate) price surged by more than 4% to $74.15 per barrel, the highest level since the end of 2014. The immediate cause is the production increase decision announced during the OPEC meeting on June 22. The logic here may look counterintuitive as the price is higher while increasing supply. We are now elaborating the causal relationship in more details from the geopolitical background.

(Source: businessinsider.com)

Geopolitical Tensions from Supply Disruptions

The world oil market is being tightened as a result of unplanned supply disruptions happening in Canada, Libya and Venezuela as well as sanctions against Iran.

Based on the data provided by Thomson Reuters, over the past few months, Venezuela, one of the OPEC members, has seen a sharp fall in oil deliveries from 2.3 million barrels per day (bpd) in January 2016 to 1.24 million bpd in April, and further to 1.17 million bpd in May. The output drop was caused by the general economic crisis of the country and the mismanagement, corruption and lack of investment money of PDVSA, Venezuela’s state oil company.

The supply from Libya was removed primarily due to this year’s bad weather. While the outage is hence expected to be temporary, there has been great push on oil price since more than 120,000 bpd was taken off the market.

(Source: tubiaojia.com)

As the fifth-largest oil producer, Iran is pumping about 5% of the world’s oil. The major importers of Iranian oil include China, India, Turkey and Italy. As President Trump was officially implementing sanctions on Iran, there is expected to be a huge shortfall because a substantial amount of crude from the market would be threatened to remove. Last Tuesday U.S. State Department pushed foreign nations to cut their Iranian oil import to zero by November 4, otherwise they will face sanctions as well. U.S. crude price soared $2.45 a barrel on that day after the announcement.

(Source: dw.com)

OPEC Decision Underwhelmed the Market

In the context of steadily rising oil demand and unexpected supply cut as stated above, the market was anticipating extra supply from OPEC members. As expected, the decision of increasing production was made following the meeting, with an intent to put a cap on the rising prices and fill the supply gaps. According to OPEC’s announcement, the change would restore 1 million bpd to the market. However, on the one hand, many analysts think that it is not realistic to push some members who are already pumping at their full capacity to further bump output. On the other hand, even if the output increase is strictly followed through, the volume is much less the 1.5 million bpd from market expectation. Therefore it may still be inadequate to save the market from deficit and future declines in global crude oil inventories is highly possible.

(Source: wsj.com)

I Know First’s Successful Forecast

On June 24, I Know First algorithm recommended top 9 commodities for both long and short positions, including CME_CL1, a crude oil futures contract, and USO, an ETF tracking the price of West Texas Intermediate Light Sweet Crude Oil. Over the 7-day trading period from June 24 to July 1, CME_CL1 increased by 8.12% and USO rose by 7.42%.

 

This bullish commodities forecast was sent to the current I Know First Subscribers on June 24, 2018.

 

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