Are Oil Prices Headed Higher?
While the UAE economy is diversifying away from oil, there’s no doubt that the entire region’s fortunes are closely linked to the price of Crude. The oil price has been under pressure for the past three years, and this has filtered through to the region's stock indices and economic growth.
However, there are signs that the future may be looking brighter as demand now looks set to rise faster than supply.
Demand
OPEC and the IEA (International Energy Agency) have both increased their demand forecasts for 2018 and beyond. A recent IEA report indicated that the agency expects demand to grow by1.4 percent in 2018.
China is another factor influencing perceptions of demand. Early in the year, there were concerns about a slowdown in growth in China. Those concerns are now receding and China continues to grow at over 5 percent and off a high base.
Supply
OPEC, Russia and other oil producers have cut production by 1.8 million barrels a day since the start of the year. At their most recent meeting, they decided to delay making a decision on whether to extend those cuts beyond March 2018.
US stockpiles of crude increased in the wake of Hurricane Harvey. However, refineries are now expected to draw on that supply to meet a shortage of gasoline that has developed. The rig count off the Southern coast of Texas has fallen too. This is now affecting perceptions of supply.
Overall, the IEA expects demand to begin to catch up to supply. This is what the market is now discounting. Even though supply still outstrips demand, traders and investors have been looking for the rate of growth in demand to exceed that of supply. That change will signal a narrowing of the oversupply and eventually, demand will match supply.
The charts for Brent and West Texas crude are still in an overall downtrend but have formed a potential reversal pattern. Sentiment amongst clients trading commodities at IG index was bullish on Friday 22nd September. This ties in with the recent price action for crude.
US energy companies, which have had a terrible year, have rebounded strongly since mid-August. This is a sure sign that the market expects higher energy prices going forward. The sector reached its lowest level in 18-months amidst concerns over the effect that Hurricane Harvey would have on refineries.
The risks to the improving trend are a potential recession in the US or China or major new investment in exploration and extraction by global oil producers. Recessions are still seen as a low probability scenario at the moment. And, oil producers are unlikely to regain enough confidence for new investment until the oil price is above $80 a barrel.
The oil market is by no means out of the woods yet. Supply is still far higher than demand. But the market will always look to the future, to the time when the balance shifts. There are now enough signs of a shift in fundamentals for optimism. If the trend continues higher it is sure to improve investor sentiment in the UAE and across the region.
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