Commodities & Currencies
Oil prices have done very well over the last several months. Prices have been rising at the pump, making producers happier and consumers less so. However, gloomier days may lay ahead. The IEA thinks US shale oil output may soon surge on the back of higher prices. If this happens, it would undue the supply reduction OPEC’s cuts have created and send the market downward. Additionally, it would likely lead to an unwind of OPEC’s cuts, as if they were maintained, the reductions would be disproportionately benefitting OPEC’s competitors.
FINSUM: Oil prices have been doing better, but that does not change the fact that world has a fundamental oversupply of oil. This is not a problem by any means, but is a factor that will weigh on prices for years to come.
Oil has been in a bear market for about three years. While it has not been consistent and there have been ups and downs, oil prices have been mostly stuck, plagued by oversupply. However, Citi thinks that paradigm is about to disappear, with prices rising to $80 per barrel. Citi says a host of geopolitical risks, including sanctions on Iran, broader Middle East tensions, and North Korea are three issues which will send prices higher.
FINSUM: We aren’t big fans of this prediction. Not so much because we don’t think oil could move higher, but because forecasting political risks is a hopeless exercise. Here is a different view: the OPEC agreement falls apart because the only producer it is helping is the US (which is not in OPEC), sending prices much lower.
Oil prices have largely faded into the background of market noise over the last couple of years. Prices have been relatively steady in the $40-$60 range for some time, and the market has stopped focusing on it. However, any big change in oil would immediately grab attention. With that in mind, Bloomberg has put out its oil forecast for next year. The forecast is for US prices to fall to and average $55 per barrel next year as US oil production hits new records. The big question is whether demand will be strong enough to devour all that new oil.
FINSUM: This could be another dangerous year for oil. US output will rise, which could break the back of OPEC’s coordinated supply cuts, which have effectively created a price floor for oil.
Good news if you are long oil: OPEC has decided to extend its cuts. While the rise in the oil market has been long and slow, prices are currently around $60, which was apparently enough to push OPEC to maintain its output cut. However, there is a measure of discord between Russia and Saudi Arabia. Russia is not as reliant on higher oil prices as Saudi Arabia, and it does not want to concede too much market share to rivals by keeping production low. Therefore, it appears to favor an earlier exit of the current agreement than the Saudis.
FINSUM: Oil looks okay for now, but in the long-term we think this agreement will likely collapse because of pressure from Russia and the ever-growing US shale industry.
Oil has been doing well lately, putting a smile on the faces of traders and the shale industry and a grimace on the faces of everyday Americans. Well, Barron’s says the grimace won’t go much longer, as this oil rally is bound to fade. Oil is almost back to $60 after reaching $44 in July. However, for it to move any higher the market would need to be banking on geopolitical supply disruptions, which seems like a long shot to rely on.
FINSUM: The fundamental demand and supply picture simply don’t justify prices much higher than now, so we don’t think this run will be able to maintain its momentum.
Everything seems to be in boom mode right now despite the fact that markets and the economy have been decent for some time. One very positive sign for the markets is that commodities have been on the rise despite a long period in the doldrums. Metals and energy have both been doing well despite the structural issues that have plagued the sector for years. Oversupply seems to to have been quelled in oil, and inventories of various metals, such as nickel, have shrunk, leading to a price boom.
FINSUM: High demand for commodities is a very strong sign of economic expansion, so we take this as a reliable indicator that the economy may start to deliver on all the hype. Inflation to follow?