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The Brent crude price was above $60 per barrel this morning as it looks as if the production cuts implemented by the OPEC countries and Russia are finally bearing fruit.

Another factor is the acceleration in demand for oil from China. But be wary: oil inventories are high, and according to French bank BNP Paribas, while we may be seeing a modest draw down in oil inventories this year, this won’t make much of a dent in the large surplus accumulated in 2014 and 2015. Indeed, BNP Paribas reckons we will see a resumption of global stock builds next year, forcing Russia and OPEC in turn to further cut their own production.

Brent crude price gaining ground

The Brent crude price has been gaining ground since June, when it was at around $42-43. Since then traders of the Brent crude price have seen fairly consistent returns, with only a slight correction in September. The price of oil also represents a yearly change of over 30%.

The elephant in the room for Brent crude prices is rising US oil output. The US is now an oil exporter and is serving markets much further afield, like Asia. We are no longer in a situation where the US was a net buyer. This, analysts believe, will impose a ceiling on the Brent crude price, and unless OPEC embarks on a further round of very aggressive cuts, it is unlikely we will see the Brent crude price hit $90.

OPEC sticking together

It does seem as if the OPEC pact is holding together for the time being. Many OPEC countries have economies that depend on an oil price that is well above the $50-$60 range. Hence, there is an incentive for them to cut production. Saudi Arabia’s Energy Minister, Khalid al-Falih, likes to paint a picture of falling global stocks, but he has no control of US shale activity or indeed the Canadian industry.

US oil production is growing however. According to Goldman Sachs, US oil production growth is close to a 30 year high. As the Americans start shipping their oil to markets that were previously dependent on OPEC, competition for the black gold is now fiercer than ever. For traders of Brent crude oil, it does not look like $60 oil is something to get too excited about.

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Please note this article does not constitute investment advice. Investors are encouraged to do their own research beforehand or consult a professional advisor.

Stuart Fieldhouse

Stuart Fieldhouse

Stuart Fieldhouse has spent 25 years in journalism and marketing, including as a wealth management editor for the Financial Times group, covering capital markets and international private banking, and as an investment banking correspondent for Euromoney in Hong Kong. He was the founder editor of The Hedge Fund Journal.

Stuart has worked at CMC Markets, supporting the re-launch of its global financial spread betting and CFD trading platforms. He is also the author of two books on trading, published by Financial Times Pearson. Based in The Armchair Trader’s London office, Stuart continues to advise fund managers, private banks, family offices and other financial institutions.

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