U.S. Oil Production Contains OPEC Rally

For the past several weeks, crude oil prices have been focused on the Organization of Petroleum Exporting Countries (OPEC), most of who agreed on a 4.5-5.0% oil production cut. Libya and Nigeria are exempt from participating in the production cuts and are allowed to pump as much oil as possible. The OPEC accord that was agreed upon at the beginning of December spiked the price of oil 9% in a single day and another 4% follow through over the next subsequent trading sessions.

While the OPEC decision to cut production is important from a supply side perspective it is not the only factor influencing crude oil prices moving forward. Due in large part to advances in engineering, United States technology is unlocking millions of barrels of crude oil through fracking and unmatched drilling efficiency, since 2008 the U.S. has joined the ranks of Saudi Arabia and Russia as a key swing producer and as prices begin to rise because of OPEC production cut rhetoric U.S. oil producers will be tempted to drill and sell more oil at higher prices. Thus rising U.S. production that is not coordinated with OPEC might limit the upside on oil prices. OPEC may also have a difficult time implementing and verifying compliance of the agreed upon cuts.

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While OPEC and other oil exporting nations such as Russia that are heavily reliant on the sale of crude oil exports for revenue into their national treasury’s hope the current rally that started in December continues higher there are still technical road blocks that need to be quickly overcome or risk a fall back in prices in the near future from the high put in place in mid-December and early January.

From a technical perspective a key test for crude oil will be if prices can decisively close above the January 2nd intra-day high of $55.24 per barrel. Last year’s rallies into the summer and fall both failed to close above that key resistance zone and if prices fail again to do so at the end of January then that could hint that the current OPEC rhetoric rally is running out of steam and must be accompanied by actual decreases to global supply before prices become reinvigorated once again. However, a close above this year’s intra-day spike high of $55.24 per barrel could project a move to the critical $62 resistance zone. The level from which prices collapsed in mid-2015 cascading down to $32 by the end of that year, while a move to the $60 plus territory would be good for revenue hungry oil producers, energy stocks and commodity currencies such as the Canadian dollar and Russian ruble, it might be short lived in light of it undoubtedly incentivizing higher U.S. oil production.

The world is awash in crude oil thus OPEC’s scramble in December to coordinate an oil production cut with non-OPEC member Russia. Rising U.S. crude oil inventories could be a drag on the price of crude oil as inventories here in the U.S. have been steadily rising since 2008. Another obstacle to the rising price of crude oil could be a strengthening U.S. Dollar as a rising U.S. Dollar has a tendency to have a deflationary consequence across the commodity spectrum. The recent surge of the U.S. Dollar after the election of President Trump did not have an impact on crude oil prices as it sometimes has had in the past but that correlation may come back into play.

Contact the author Ralph Preston at rpreston@hwfi.com

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