Declining oil prices good for the U.S. economy?

Declining oil prices good for the U.S. economy?

The Schork Report publisher Stephen Schork on the outlook for oil.

Oil price forecast 2017
Oil price forecast 2017

Today is Wednesday 28th December 2016 and we are briefly commenting on the forces likely to affect oil prices in 2017.

As we reported recently and which is now common knowledge, the world has faced an oil glut mainly caused by OPEC having no agreements on output and the considerable amount of oil produced by US Shale Oil Producers all of which has caused Brent crude oil prices to fall from over 5 per barrel in June 2014 down to a barrel in Jan 2016 and are now standing at a barrel after this month’s OPEC/NonOPEC production agreement.

The question many people are asking is where are prices likely to go from here and what will influence them?

Well the answer is, that it all depends upon whether OPEC and Non OPEC countries stick to their agreements or not. On 30th November OPEC members agreed to cut oil production by 1.2 million barrels a day. On the 10th December Non OPEC oil producing countries in discussion with OPEC Members, agreed to cut production by 600,000 barrels a day.

Analysts believe that if these cuts go ahead as planned from January 2017, then we should see an eradication of the surplus supply much of which is currently stored in super-tankers; 40 of which are sitting off Singapore’s coast or in nearby Malaysian waters. If this occurs, we could very well see oil prices rise to – a barrel.

However there are a number of factors which suggest that the Agreement may not hold:

• Iraq for example may need to increase funds to pay for the cost of its war with ISIS
• Iran, which has been subjected to severe trade embargos will be looking to earn as much revenue as possible to reflate its economy
• US Shale Oil producers which have cut back production because of the low price may increase production again as prices continue to rise.

In addition we should also not forget that China’s economy has for many years been the second largest oil consumer in the world following the US. If its economy falters in 2017 then this is likely to have a considerable impact on prices too.

Finally we must not forget President-elect Trump’s policies, which at this moment we have little idea as to how they will affect oil prices until they are announced.

It goes without saying that the value of the dollar also determines price per barrel as oil is still predominantly purchased in US dollars. We are assuming for 2017 that continued dollar strength will to some degree maintain the status quo as far as its effect on oil prices are concerned.

Our view and best estimate at this stage, is that production limits will be adhered to for at least a few months but we are quite frankly not too optimistic about them holding throughout the entire year. Yes oil seems to be reasonably pegged at and could rise to mid ’s. Much beyond that we doubt unless of course there is some International crisis or an increase in conflict in war torn areas of the world.

So to conclude, subject to the proverbial black swan turning up, we shall see oil prices throughout 2017 vacillating between – in the main.

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