Oil

At the end of May, as OPEC and other oil producers reached an agreement to extend oil production cuts until March 2018, most analysts expected the market to reward the announcement with some form of price rally. This anticipation was reinforced by a minor price recovery that was largely driven by statements in the build-up to the meeting, which strongly hinted at an extension. Surprisingly, the official announcement of the extension triggered a price decline that completely wiped out all the gains enjoyed since the original agreement was announced.

Christmas came early for the oil industry. The one-two punch of the OPEC agreement, followed closely by an agreement with other oil producing nations, to cut oil production lifted oil prices by 20% to levels not seen since the mid-2015. As the market adjusts to this new paradigm, it is important to take a step back, soberly reflect on the big picture, and avoid being bogged down in the minutia of the oil market. This was the approach I took 6 months ago when I published an article grandly titled “The Future of Oil”. At the time, it was clear that the prevailing market conditions had set a price ceiling, with the price of Brent crude mostly staying below $53 per barrel (pb) until the OPEC agreement was announced on the 30th of November.

The price of oil has nearly doubled since the lows of $27 per barrel reached at the end of January. The growing consensus among market analysts is that a market recovery is underway, with one analyst going as far as predicting that oil will reach $85 per barrel by Christmas. A glance at the evidence greatly supports this – OPEC’s failure to agree on a quota hasn’t curtailed the price rally, there is a steady drop in non-OPEC (read US shale) output, and a summer driving season is giving oil demand a boost.