Crude price volatility to stay

Another possible rate increase from Federal Reserve by mid-year may boost dollar, impact oil prices

Over the past few months, analysts and money managers had been bullish on crude oil prices. Producers were feeling far more profitable, compared to a year earlier, and some felt $60 a barrel was achievable in the lead up to Organization of the Petroleum Exporting Countries’ (Opec’s) May meeting in Vienna. 

But, oil has certainly taken a backward step since the ‘CERAWeek’ in early March. The price has dropped 12 per cent since the February high and nine per cent of that decline came in the week ended March 10. This rout comes after the realisation that crude stocks are not declining. In the US, these stocks hit an all-time high in March.  There has been a resurgence in the US rig count and increased supply in the market. With new technologies and “industry smarts”, these producers are now able to produce a barrel of oil cheaper than ever before.

Money managers and hedge funds have become less bullish. This is a change from their record open positions in futures and options earlier in the month. This change of sentiment has assisted the recent market correction.

So, what key factors could impact crude prices over the next three to six months?

Opec and non-Opec producers, including Russia, will certainly have much to discuss in the lead up to the next Opec meeting. The big question must be whether it extends the supply cuts for another six months, from June 30.

There is no doubt the coming largest initial public offering (IPO) in history from Saudi Aramco will also be a key factor that will underpin the Saudi viewpoint in Vienna. Will the other Opec producers be as committed to another round of production cuts? And, where do the Russians sit with these potential strategies?

Market forecasters are also questioning whether or not there will be the traditional increase in consumption over the northern hemisphere summer driving season. 

On a broader front, is the Trump rally, which has impacted equities and commodities, running out of steam? If so, could this be a possible handbrake for the crude market? Another possible rate increase from the Federal Reserve by mid-year could boost the dollar and impact oil prices.

One concern some analysts are considering is the role of nature over the northern hemisphere summer. With recent evidence of destructive floods in Peru, caused by unseasonably warmer than average oceans, could we see weather outages and a more severe hurricane season?

All these and other geo-political factors make the price of crude difficult to forecast. If there are minimal disruptions to global supply and Opec opts for another six-month production cut, any betting trader would probably assume prices will trade higher over the final two quarters of 2017. How much higher is also greatly dependent on money managers and hedge funds, and where they see potential opportunities.

One thing for sure: Price volatility is not going to hibernate, and traders are looking forward to Vienna’s outcomes!

The author is chief executive officer, XM.com (Australia)