There are two forces at work in the oil markets today creating a
tug of war. On the one hand you have U.S. shale producers on a quest to reach
10 million barrels a day in production amid falling seasonal demand. On the
other hand you have the perception that the oil glut that has gripped the world
over the last few years is coming to an end because of OPEC restraint and
increased demand from improving economies.
These forces are keeping the oil market range bound, with crude oil
prices trading between $47 and $54 per barrel.
The reality in my opinion is that while OPEC has stuck to its
agreement of 2016 to limit production to 32.5 million barrels a day, oil
oversupply continues. It's true that oversupply is about half of what it was a
couple of years ago, according to the Office of Economic Development, but it is
still there.
Libya which is not part of the agreement continues to produce more
oil than it did a year ago. It recently announced it wants to get back to 1.25
million barrels a day, or about double what it produces today.
"Production beginning to rise and demand
beginning to fall is not a recipe for higher prices. I can envision oil
dropping as low as $45 by mid-January."
But the seasonal factor will have the biggest influence on oil
prices until the end of the year.
Demand generally drops from October through mid-January as summer
driving season ends and refineries enter turnaround stage (to get ready for
next summer's driving season.) Gasoline starts to rally around Valentine's Day,
as oil refineries gear up for summer using more oil to make gasoline.
Refineries are entering turnaround now, so you'll see supplies
build because refineries aren't using as much oil. And while gasoline and
diesel have been negatively impacted by recent hurricanes Harvey and Irma,
supplies are beginning to be replenished.
Production beginning to rise and demand beginning to fall is not a
recipe for higher prices. I can envision oil dropping as low as $45 by
mid-January.
I do see light at the end of the tunnel. I'm looking for prices to
rise in 2018 because the economy is improving and people are spending money. A
durable goods report that came out last week tripled expectations, showing the
economy is solid. Still, expect a couple more months of pain. The market is
ahead of itself right now.
Source: CNBC