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Expert analysis: Could 2018 mark a turning point for oil?

January 5, 2018 2:47 pm


Unrest in Iran continues to support the oil markets and helped push prices to two-year highs during the first week of January.

Could bulls continue their charge in the face of rising output from both Russia and the US?

FXTM’s Jameel Ahmad shares his outlook for the commodity this month.

December 2017

The current oil rally stems in part from December’s closure of the North Sea Forties Pipeline (FPS).

At full capacity, this crude oil conduit carries around 450,000 bpd and is responsible for delivering the oil underpinning the Brent benchmark — making it one of the most significant in the world.

The discovery of a hairline fracture and the pipe’s subsequent closure in early December was sufficient to spark supply concerns, and Brent crude rallied 1.6% when the news broke.

Pipeline issues remained a dominant theme throughout December. An explosion on the pipeline that serves Libya’s largest export terminal wiped at least 70,000 bpd from the nation’s production capacity.

This, coupled with the FSP issues and predictions of growing demand, played to investor concerns of undersupply and helped bolster the markets throughout December.

Read: Are global oil reserves so fragile that a pipe burst moves up prices?

January 2018

With both the FSP and Libyan pipes back online now, this week’s supply worries are likely the result of civil unrest in Iran, OPEC’s third largest producer.

At the time of writing, Iranian production remains unaffected by the protestors, suggesting that undersupply is unlikely to remain a dominant theme as we progress into Q1.

Indeed, despite the soaring oil markets making headlines this week, we’ve still seen the price settle lower for brief periods, and it is possible that we will start to see a price downturn as January progresses.

As ever, U.S. Shale remains a significant agitator of the oil markets, and reports that American output is now at its highest level in four decades sent prices into a short-lived dip on Tuesday 2 January.

With U.S production in December thought to be in the region of 9.75 million bpd, it won’t be long until the nation achieves its targeted 10 million bpd.

This may well spark concerns of a supply glut and will weigh heavily on buying sentiment.

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Russian production in 2017 will also be at the forefront of investors’ minds.

Despite Moscow’s commitment to OPEC-led production cuts last year, the nation still succeeded in producing a record average of 10.98million bpd in 2017.

This average includes a steady decrease since October, but the news will likely lead investors to question the effectiveness of OPEC’s production cuts if a major advocate of the scheme is still posting a year-on-year rise in production.

While the oil markets continue to find support from December’s unexpected supply issues and January’s geopolitical tensions, the effects of both are likely to be short lived.

Iranian production remains unchanged, and concerns around undersupply are unlikely to persist now that both the Libyan and North Sea pipelines are running at full capacity.

Ever increasing production from the U.S will continue to challenge OPEC’s attempts to rebalance the markets, and has the potential create a supply glut in 2018.

 

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Jameel Ahmad is an expert in financial market developments, and specialises in global currencies, commodities and emerging markets. FXTM’s VP of Corporate Development and  
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