Oil prices are likely to climb if members of the Organization of the Petroleum Exporting Countries agree next week to curb crude production, but upside will be limited if the resulting rally give U.S. producers incentive to ramp up output once again.
And President-elect Donald Trump’s energy policy plans could intensify OPEC’s worries over loss of market share and eventually make it even easier for the U.S. to ramp up output in response to higher prices.
“News of the potential agreement could still lend decent support to oil prices in the short term outlook,” said Fawad Razaqzada, technical analyst at Forex.com. But “those potential price gains will likely be capped in the medium term by expectations of a renewed rise in oil production in the U.S.”
Oil prices have seen volatility as the 14-member group of major oil producers debates how to complete a plan announced in late September to limit output at 32.5 million to 33 million barrels a day.
OPEC is expected to hash out the final details at its official meeting in Vienna on Nov. 30. Its members have been gathering behind closed doors ahead of that to discuss the plan.
“It really depends on the actual agreement, but the price should move into the mid-$50s and possibly as high as $60,” assuming a deal to cut output is reached, said James Williams, energy economist at WTRG Economics.
Futures prices for West Texas Intermediate crude CLF7, +0.15% settled at $48.03 a barrel on the New York Mercantile Exchange on Tuesday. They’re up about 30% year to date, but well below the peak seen in 2014 above $100.
The Trump effect
Traders have been weighing the potential impact the Trump administration will have on the energy sector, as his plan to ease federal restrictions on oil drilling would benefit some in the oil industry, but likely further add supply to an already glutted market over time—weighing on prices.
In a video posted on YouTube, Trump pledged to “cancel job-killing restrictions on the production of American energy,” including shale.
“Trump’s policies will have an impact but they will not be immediate,” said Williams. “This year the greatest influence by far will be if OPEC’s actions result in higher prices.”
Still, the impact of Trump’s policies in the oil market may become evident in the second half of next year, he said.
That impact is likely to be first seen in the Bakken in North Dakota “as it would accelerate the completion of the North Dakota Access pipeline,” said Williams. “The lower transportation cost means producers there will receive more for the oil they pump and encourage them to complete more wells.”
Trump’s energy policies would also eventually lead to more drilling on federal lands, which was delayed during the Obama administration, Williams said.
U.S. oil production was already a factor in OPEC’s decision against cutting output in late 2014, even as prices had plummeted. The group, instead, choose to defend its share of the oil market from non-OPEC producers, particularly the U.S. shale industry.
With Trump aiming for U.S. energy independence, OPEC could revert to protecting its market share, instead of working to temper the global supply overhang that’s dragged prices down by more than half from their peak in mid-2014.
Several years of $100 oil had contributed to the rate of development and improvements in shale technology, said Williams. Now oil prices “north of $70-$75 once again will threaten OPEC’s market share.”
So “an OPEC deal will eventually help the U.S. become the real star producer,” he said. That claim to fame belongs to Russia, the world’s biggest oil producer, with Saudi Arabia being the largest producer in OPEC.
“A good [oil] price will spur the completions of uncompleted wells and there are about 5,000 of them,” Williams said. Still, “no matter what Trump’s plan is, it will be months before it impacts production.”
Wait and see
To be sure, OPEC’s plan is also far from a done deal.
Expectations that OPEC would reach a final agreement were starting to grow. Then on Tuesday, Reuters reported that the group will wait until the official meeting to debate a plan to production by members by 4% to 4.5%, excluding Libya and Nigeria. The news report also said that Iran and Iraq raised certain conditions for their participation in the agreement.
To reach a final deal, the group will have to collectively agree to ease back production, which the International Energy Agency estimated at 33.83 million barrels a day in October.
“Rationally, the group should be able to reach agreement to cut its oil production in 2017, even if it is only a watered-down version of what was contemplated in late September in Algiers,” analysts at Credit Suisse, led by Jan Stuart, said in a Tuesday note.
“However, we think it is at least possible that key members not only fail to find common ground, but break off talks and resume a drive for market share all over again,” they said.
OPEC would have to set individual member quotas. That will be a challenge since some members, particularly Iran, which wants to boost output to pre-sanctions levels, and Iraq, which is fighting Islamic State, have said they want to be exempted from production cuts.
The political battle between Iran and Saudi Arabia is “about power as much as economics and therefore hard to predict,” said Vic Sperandeo, president and chief executive officer of EAM Partners, which is known for the Trader Vic Index, a long-short algorithm that has a commodities focus. “Most likely, any agreement will try to look positive, but will have very limited production cuts.”
He expects OPEC to “lower production a bit just for show,” and that could create an “initial up move,” but prices would then resume a move lower.
Omar Al-Ubaydli, a program director at the Bahrain Center for Strategic, International and Energy Studies, singled out two scenarios. “Either they agree on each country producing optimally from its own perspective, and they will present it as if it is a collective agreement…or they will try to agree on something substantive and fail,” he said.
In both cases, he expects to see only a “negligible effect” on prices as “oil markets are getting a little wiser to OPEC’s ineffectiveness and window-dressing.”
Still, Al-Ubaydli, does see a downside price risk. “Trump is likely to enact policies that decrease U.S. oil imports,” he said. And a rise in shale oil production means that “prices above $60 a barrel are unlikely.”
That said, “Trump’s policies will have an effect once their precise details are confirmed,” said Al-Ubaydli. “Everyone is holding their breath.”