Oil started the first week of 2017 with a bang but ended it with a whimper, as the Opec fireworks that dominated the last quarter gave way to the more mundane reality of monitoring if the cartel will make good on its pledged cuts.
Brent crude oil briefly touched an 18-month high above $58 a barrel on the first day of trading but there was little fresh buying by funds that had already propelled prices higher by more than 30 per cent in the last six weeks of 2016, as Opec moved to agree the first supply curbs since 2008.
“The Opec and non-Opec cuts agreed at the end of last year have helped changed the underlying sentiment of the market, but for now oil is moving into a holding pattern,” said Michael Tran, director of global energy strategy at RBC Capital Markets.
“The market is now looking for evidence of compliance. The recovery could be slower and steadier from here.”
By Friday prices for were on course to finish down slightly on the week, trading around $56.75 a barrel, with traders cautious about how much further prices can climb, with the market still oversupplied.
After hitting a 13-year low below $30 a barrel in early 2016, Brent eventually recovered by about 50 per cent over 12 months of volatile trading.
Opec kingpin Saudi Arabia, which led the cartel in agreeing output cuts on November 30, has indicated it could cut even more production to help rebalance the market after two-years of low oil prices slashed its budget and led to widespread cutbacks throughout the oil industry.
Its Gulf Arab allies, including Kuwait and the UAE, are also expected to comply closely with planned cuts, analysts said, though doubts remain about how Iraq — the second largest producer in Opec — will implement cuts. Russia and other non-Opec countries have also pledged to participate in cutting output.
All will be watching the US shale industry closely in 2017 to see if the nascent recovery in prices rekindles the sector that contributed the most to the build up of a glut during four years of $100 oil between 2011 and 2014.
“We may not see oil rally much initially from here until we start to see global inventories drawing down,” said Amrita Sen at London-based consultancy, Energy Aspects.
US oil production could grow by 200,000 barrels a day in 2017, Energy Aspects said, but that should not be enough to offset the combined targeted Opec and non-Opec cuts of more than 1.5m b/d, even without full compliance. Energy-friendly policies from President Elect Donald Trump could help, though price is expected to be the biggest factor for the shale industry’s outlook.
Hedge funds are still positioned for further price gains in oil, holding a record net position equal to almost 800m barrels of crude through futures and options contracts across Brent and US benchmark West Texas Intermediate.
That could, however, pose a short-term risk to prices should funds decided to cash in winning bets, selling contracts in the process.
“The biggest risk to oil markets during the coming weeks and one that could yield a major correction is the record speculative position currently held by hedge funds,” said Ole Hansen, head of commodity strategy at Saxo.
“We view upside potential on Brent crude oil beyond $60 a barrel as limited at this stage.”