While the November OPEC deal sent crude sailing above $50, oil markets are expected to face some strong headwinds going forward. The Federal Open Market Committee will hold its policy setting meeting from the 14th to the 16th of December. The markets are expecting a rate hike due to strong U.S. economic data and job figures. “U.S. GDP growth in the third quarter of 2016 was revised upward from initial estimates of 2.9 percent to 3.2 percent, according to the Bureau of Economic Analysis.”
This month’s job market report showed a total of 178,000 jobs added in November, with the unemployment rate at 4.6 percent. Also, cases filed for unemployment benefit have dropped to 258,000, significantly below the ceiling of 300,000. This was the 92nd week in a row that claims have been below 300,000. Fed Chair Janet Yellen has incessantly emphasized the case that any job increase above 100, 000 is symptomatic of strong growth. It is no surprise then that many market analysts see a rate hike of 0.25 as a high possibility in December. As a result of this, the dollar index touched a 13-year high. Such a strong dollar is bad news for commodities, with costs increasing in non-dollar markets.
Also, the recent uncertainty over the OPEC deal becoming a reality has added further downward pressure to oil prices. Brent and WTI both shed a few points after news of record production from OPEC and Russia, as well as a 4-million-barrel inventory build at Cushing. Corroborating this uncertainty is the EIA’s short term energy outlook released this November.
“EIA forecasts Brent crude oil prices to average $43 per barrel (b) in 2016 and $52/b in 2017. West Texas Intermediate (WTI) crude oil prices are forecast to average about $1/b less than Brent prices in 2017. The values of futures and options contracts indicate significant uncertainty in the price outlook.”
Another important issue that may affect the demand of oil is China. With the Financial Times reporting that the strengthening dollar could be fatal news for the Chinese economy.
“The Institute of International Finance, a global association of financial institutions, calculates that in the first 10 months of this year net capital outflows from China totaled $530bn, with October marking the 33rd straight month in which more money left the country than flowed in. With money pouring out of China, Beijing has little choice but to tighten domestic monetary conditions in spite of the difficulties for companies already unable to service their debt.”
Simple economics shows that a tight monetary policy will cause imports to feel the heat. Moreover, China is struggling with its transition from a manufacturing to a service based economy. This has led to a weakening in demand from one of the major engines of the oil market.
In addition to this, many oil companies are readying themselves to kick-start previously postponed projects. The purchasing of some stakes in Rosneft by Qatar, the Mad Dog oil field by BP, Royal Dutch Shell’s venture into Iran and many more. The Kazakh oil field, Kashagan, is another addition. All this and the doubts hovering over the deal, certainly doesn’t bode well for the oil industry. So while things may all appear to be hunky-dory, the reality is quite different.
By Osama Rizvi for Oilprice.com
