Oil prices are currently in decline, and commodities market watchers continue to speculate upon the level at which prices will land.
While WTI crude finished up a bit at close of market on Friday, the price level was down for the week. Today’s current glut in global supply does not show any signs of decreasing, in spite of ongoing production cuts by OPEC nations as well as Russia. And as the country continues to get oil fields back into greater production, Libya’s production levels may become more impactful and result in an increase in overall global stores.
Add to all of that the United States’ increased reliance upon domestic supplies, rather than imports, and the outlook for oil prices continues to be bleak.
Libya Working Toward Full Production
Due to the continued unrest and two warring factions in this troubled country, Libya will maintain its exemption from OPEC’s agreed upon production cuts for the remainder of 2017. Reuters reported in March the nation produced 622,000 barrels per day (BPD) down from 683,000 bpd in February.
However, there is news of increased production in a field located in the Western quadrant of the country: the El-Feel oil field is an ongoing production partnership between Libya’s NOC and Eni SpA, which is based in Italy, and is expected to be operational in the near term. Production is scheduled to resume shortly, which could potentially add 80,000 bpd to the overall monthly output.
According to Bloomberg, the national oil production levels targeted by their ministry, are expected to reach production levels of 1.2 million barrels by year end. While these levels are indeed impressive, they are still less than the 1.6 million-barrel production level at which the fields operated prior to the uprising in 2011.
Global Glut
In spite of turmoil throughout the Middle East, there continues to be an abundant supply of oil worldwide. This past Wednesday, officials stopped an attempted attack on the distribution facilities at one of Saudi Arabia’s Aramco plants.
Utilizing explosives attached to a motorized remote controlled boat, the target was a facility located along the coast. While this incident is unsettling, the complete shrug with which it was greeted by the markets show that the high levels of supply may offset such turmoil.
OPEC to Discuss Production Cuts
The scheduled meeting on May 25th will be key in determining the path that oil prices take, especially for the higher demand summer months. Many analysts believe that the continuation of the OPEC production cuts (as are expected via the May meeting) will lead to what economists describe as an end to the global surplus by year end 2017.
Russia is also reportedly on board with a continuation of the production cuts, and if this scenario comes to fruition, 2018 may see a rebound in oil prices.
The Case For Geopolitics Having No Effect
In a recent Forbes article, Guarav Sharma puts forth the claim that geopolitical risk is as overblown now as it was in 2014. Sharma’s argument centers around the belief that all of the geopolitical realities are already factored into the markets. He also posits the belief that risk fatigue is alive and well, especially in the oil markets. While risk fatigue may be an absolute truth, the realities of production interruptions and distribution disruption caused by geopolitical upheavals should not be ignored.
It cannot be denied that unrest in the major oil production areas of the world has a tangible and real effect upon oil prices, although whether or not those events translate to major impacts upon western prices are as great as oftentimes perceived, can be debated.
As we navigate this period of low prices and geopolitical unrest, it is certain that all eyes will be on the OPEC meeting in late May, Russia’s response, and perhaps most importantly, Libya’s ability to get their infrastructure up and running at levels that support significant production.
It is widely agreed that increased production coupled with anemic demand will not do oil prices any favors. If the myriad economists opining upon the situation are correct, it may be end of year before we have seen the end of the glut. The pros and cons of low oil prices may be a topic for another day, but it cannot be argued that a heightened awareness of world geopolitics will serve investors very well.
Regards,
Ethan Warrick
Editor
Wealth Authority
