“The price of Brent Crude oil rallied to almost $50 a barrel in the early half of last week as hopes rose for a deal on production cuts at the OPEC meeting on Wednesday this week. However, anxiety has taken over as the meeting approaches with fears no agreement will be reached pushing the price down to around $47 a barrel,” says Russ Mould, investment director at AJ Bell.
“OPEC’s record at reaching deals is mixed and its record at sticking to them is even worse so it may be unwise to place too much faith in the latest round of talks. That said most member states would welcome higher oil prices, either to help balance their budgets or, in the case of Saudi Arabia, fire demand for the projected stock market flotation of Aramco.
“Given the complex politics of OPEC it may be best to focus on four data points which are more tangible and therefore easier to follow, to see whether the fundamentals of the oil market are sound or not.
1. “US oil inventories. Oil inventories have increased for four of the last seven weeks running and the year-on-year growth rate has accelerated slightly to 7%, so this is a concern. The tighter inventories are in the world’s largest economy going into the winter season, the better it could be for oil bulls.
Source: US Energy Information Administration. Excludes Strategic Petroleum Reserve.
2. “US rig count. One key feature of the last two years has been how the oil majors have markedly changed tack when it comes to cutting costs. Consultants Wood Mackenzie assert that $1 trillion-worth of exploration projects have been cancelled out to 2020. This supply-side discipline can be seen in the US operational rig count provided weekly by oil services giant Baker Hughes. From a high above 1,900 in 2014, the number of active rigs collapsed to barely 400 by this spring although it has since rebounded strongly to 593. Bulls of oil will be hoping the capital investment is kept tight and rig activity subdued. A big surge in the rig count could potentially be seen as a negative development.
Source: Baker Hughes
3. “The international rig count. Published by Baker Hughes on a monthly basis, this dataset shows a similar trend to the US numbers, namely a huge collapse in activity. At the trough, the number of active rigs was down by some 45%, although, as in the US, activity has begun to pick up again in the last couple of months.
Source: Baker Hughes
4. “The dollar. This one is ignored at your peril. The US currency looks to have a near-perfect inverse correlation with oil – so as the dollar strengthens oil weakens and vice-versa. This makes sense as a stronger dollar makes oil more expensive for nations whose currency is not the dollar or linked to the buck. The greenback is trading at 11-month highs, according to the Bank of England’s trade-weighted basket of currencies, relative to the US dollar, and it could go further if the US Federal Reserve starts to hike interest rates with any gusto, so the dollar has the potential to be a restraining influence on the price of crude, if history is any guide.”
Source: Thomson Reuters Datastream, Bank of England (shows the dollar index inverted)