Trends: Back to Normality
15-Nov-2017, 09:46 / Brokerage For the first time since 2015, the price of Brent crude oil has risen above USD 60 a barrel, and the price of WTI crude oil above USD 55 a barrel. The main reason for such growth is the apparent consequences of the OPEC efforts on balancing the oil market.
The US reserves of crude oil and oil products are at about the two-year minimum volume. Due to efforts of the oil cartel member-countries and the growing demand, the oil reserves were reducing during the first three quarters of 2017. According to the American agency EIA, starting from the last quarter of this year, the world consumption and production of oil will reach a balance. The main problem is still the growing extraction of shale oil in the USA. However, according to the third quarter results, the leading suppliers of oil services warn that the growth of shale oil drilling is becoming more moderate and the budgets for the research and extraction of oil are not growing. In fact, the number of oil well drills in the USA is not growing at the same rate as at the start of the year.
It has to be noted that OPEC has set the goal of reducing reserves in OECD countries below the mid-level of the recent five years. As of today, the set goal has not yet been reached, and the market is widely expecting prolongation of the agreement on the reduction of oil extraction in 2018.
It is remarkable that the big difference between the prices of Brent and WTI crude oil stimulates the faster development of oil export from the USA. For example, in late October, Americans exported more than 2 million barrels of oil a day, which exceeds the oil export of the same period last year by six times. It has to be noted that the growth of export must contribute to reducing the difference between Brent and WTI. However, the opportunities for oil export growth from the USA are limited by the available infrastructure, as oil export has been under a ban for a long time.
The growth of export may negatively affect the observation of the agreement on oil extraction reduction on the part of OPEC members. Meanwhile, the level of observing the agreements is kept at a high level - 92% in October, which is higher than 86% in September. The biggest exporter of OPEC - Saudi Arabia - keeps extracting oil below the agreed upon level. Whereas, in Venezuela, oil extraction keeps on falling due to the complicated economic situation in this country.
Restoration of the oil market will result in improving the financial performance of the oil industry. In the last quarter, the energy sector is expected to show the highest profit growth among all sectors at S&P 500 in the amount of 138%. The high growth is related to the low base of comparison, as in the third quarter of last year, many segments of the energy sector, such as oil prospecting, production and drilling, suffered losses. Thus, a world where oil is traded at USD 55-60 a barrel has become a new norm for oil companies. And it has to be noted that most companies are capable of functioning in such world with success and profit.
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