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The
monthly average U.S.-dollar price of West Texas Intermediate (WTI) crude oil begun
2017 essentially where it left 2016 -- gaining just $0.53 (1.0%) in January, to
$52.50 per barrel. The increase coincided with a marginally weaker U.S. dollar,
the lagged impacts of a 33,000 barrel-per-day (BPD) rise in the amount of oil
supplied/demanded in November (to 19.7 million BPD), and an uptick in accumulated
oil stocks.
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OPEC
appears to be making good on its promise to cut output. A Reuters
survey found that OPEC cut output by over 1 million BPD in January, achieving
an 82% compliance rate with the promised cuts. "This is very high, a good
number," an OPEC source said. Several prominent oil market analysts expect
inventories to draw down in the first half of this year because of OPEC
production cuts. Barclays,
for example, estimates oil inventories will fall by 900,000 bpd in the first
quarter, helping to tighten the market. But the Energy Information Administration
has a much more bearish view of the situation, expecting inventories to
increase throughout this year by 300,000 bpd, only starting to draw down in the
second half of 2018. As such, the agency expects oil prices to remain below $60
per barrel over the next two years. Because oil futures prices exhibit a mix of
contango and backwardation, it appears traders tend to favor the EIA’s opinion
and thus do not expect much upside potential for prices.
Claims
that there are twice the volume of oil and gas reserves than the world will
need through 2050 raises the possibility the oil industry could race to produce
as much as possible to monetize the value, which would keep prices low for the foreseeable future.
The foregoing comments represent the
general economic views and analysis of Delphi Advisors, and are provided solely
for the purpose of information, instruction and discourse. They do not
constitute a solicitation or recommendation regarding any investment.
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