We are in for a couple of big weeks of oil price news with its implicit consequences for the energy majors. The price of Brent crude is currently at $70 and West Texas Intermediate is priced at $65. But that’s not what should be exciting for oil investors.
Firstly Royal Dutch Shell, Chevron, ExxonMobil and BP are all reporting their full year results over the next two weeks. The big oil companies have been cutting costs and were able to show a profit in Q3 last year despite oil then trading at around $50. Oil was down at $28 in only 2016, so has had a good run in the last couple of years which will have stood you in good stead if you were trading CFDs or ETFs directly linked to the oil price.
Oil price news indicates fundamentals supporting $70
Can the oil price make any more ground, or is it time to start thinking about those short trades?
“The three positives are a stabilisation in global rig activity, falling American stockpiles and the weaker dollar,” comments Russ Mould, Investment Director at AJ Bell. “The potential negative is that the futures markets show that traders and speculators have accumulated huge long positions, so you do have to wonder what might happen if they start to sell so they can lock in a profit – or to cover losses suffered elsewhere.”
The US active rig count, which is a key benchmark of how healthy the oil industry looks, seems to have stabilised at around 930, down from a peak of 958 in the summer, according to oil price news from Baker Hughes. Traders who expect that the shale rigs might jump in at $60-$65 and start pushing the oil price downwards, as they did in 2015-16, will be a little disappointed to hear that the shale rig count has also flattened out.
OPEC is making its influence felt
Outside the US, oil price news indicates that the global rig count is growing, but only slowly. Mould thinks this is a good indicate that OPEC members are sticking to their commitments. “The figures also imply that the quoted global majors are sticking to their capital disciplines too,” he says.
US oil inventories have been dropping steadily in the course of 2017, which we think will be a significant support fact for oil at $70 bbl. But potentially even more interesting is the fact that the USD has been falling. This means that countries which have currencies that are not linked to the USD can buy cheaper oil. Go back as far as 2007, and whenever the USD weakens, oil gains in value. It is entirely likely that this will happen again, although this time the oil price started to move on the back of OPEC cuts, non-OPEC oil producers coordinating with OPEC, and falling US oil stockpiles in 2017.
The Armchair Trader says:
So far we think the oil gains in 2016-17 have been driven by OPEC managing to asset a level of discipline on OPEC members and getting some non-OPEC members like Russia to play ball. Russia had been suffering some economic misfortune with oil under $50, and making it more expensive is a key strategic priority for the Russian government. They had to coordinate with Saudi. Oil traders should watch the USD now. If it continues to weaken, we could see another $10-$15 on the oil price inside the next six months.