Market analysis by Hussein Al Sayed: The two forces pressing down on oil prices

Most unpopular word – oversupply – keeps hitting the headlines … and the price of the commodity. The appetite for crude oil stayed sporadic through March. Traders are sceptical because United States producers are keeping the pressure up and building inventories. It appears that Opec’s attempts to build up the price are not going far enough. 
There are two main pressures on the crude oil price: the rock and the hard place. The rock is US supply, which keeps going strong. The hard place is a volatile greenback which – even when weaker – is not stimulating demand for crude. After trading in a narrow range for almost three months, we experienced a steep sell-off for most of March. Declines exceeded 10 per cent before struggling back upwards after Opec’s willingness to extend production cuts. This could turn out to be a short-term rise. While it demonstrates commitment to cutting supplies, it is only half the battle.
The market has changed, perhaps forever. Oil markets are currently being driven by two main sets of data, neither of which are under Opec’s direct control. These are US rig counts and petroleum inventories. Recently, US drillers pushed aggressively forward. Crude oil bears cheered as drillers ramped up their rig count for 10 weeks running. Oil prices fell below US$49 per barrel as oil inventories in the US rose 50 million barrels to a record high of 533 million barrels. However, another record was reached at the same time – the number of unfinished US shale oil wells. The wells were abandoned as the oil price burned to ashes of its former self. This could mean that drilling activities might not be as negative to prices as assumed. Nonetheless, drilling activity is picking up as the price slowly rises phoenix-like from the flames. 
Late yesterday afternoon, Brent crude was trading at $54.70 per barrel. Despite the short-term crests in the otherwise becalmed crude oil prices, it is difficult to get away from the reality that the oil markets have changed. Commitment of Traders (COT) data shows that shale producers are re-entering the market even more aggressively.
They are selling future contracts at a record pace, strongly challenging the decades-old status quo built by Opec. The US producers need to make up for lost revenues while protecting themselves from another downturn in oil prices. I am keeping a close eye on this data to understand how producers and speculators are behaving. 
It took three years for the US shale industry to become strong enough to challenge Opec and keep a cap on oil prices. Since the prices plunged in 2014, shale producers have been eating up market share. But Opec’s power and experience still carry a huge amount of weight. I believe that as long as Opec producers keep their commitment to balancing the market, prices will recover. It might be a roller-coaster ride until they do. Gulf economies were weakened by three years of depressed oil revenues. They cannot afford to enter a new market share war. Instead, they are wisely diversifying their economies. The aim is to recover their own losses and to protect from future oil price downturns. 
The US shale industry and Opec have diverged in their approach towards the market. Shale producers are moving to increase supplies. Opec members counter by trimming supplies. As chess games go, it is stalemate for the time being. The medium-term outlook is a different story. The winner of the game is likely to be the group that has the most influence in developing countries with promising growth.
Emerging markets will be coming into their own over the next decades. The US president Donald Trump intends to restrict trading ties with blocs such as Asean. That would leave Opec in a much stronger position to increase trade and supply oil to the emerging markets. As global growth picks up pace, Opec could get the opportunity to checkmate US shale, simply by virtue of its stronger trading ties.  
Let us recall again the most unpopular of words for Opec – oversupply. Once that word fades from price fundamentals and world economic growth turns around, the game will change. Rising demand may be the power that blows the oil price out of its tight squeeze between a rock and a hard place. Investors need to watch carefully and time their investments finely to take advantage of the surge of growth in crude oil prices that could follow.
Hussein Al Sayed, chief market strategist for the Gulf and Middle East at the forex broker FXTM, is also host of the evening business show Bursat Al Alam on CNBC Arabia.

Source: The National