With prices leveling off and a continued resurgence in American production, oil has been having a tough few days. Oil stockpiles are at historic highs and price predicting analysts are all over the map.
Bubble size represents market cap
FIGURE 1: PERFORMANCE OF OIL AND GAS COMPANIES
Description: Figure 1 highlights the performance of the oil and gas industry for the month of April 2017 (x-axis) and the performance of the 11 months prior to April 2017.
Analysts’ predictions range from a 20% decrease from current levels to about $42 / barrel to an exuberant 100% increase to about $100 a barrel by next year. Its enigmatic that market perceptions are so divergent and doubly disconcerting given the disproportionate impact energy prices have on our economies.
Unquestionably, oil supply and demand are paramount in determining prices. According to the EIA, global oil production is 98.3 million barrels per day, and global consumption a little lower at 98.1 million barrels a day. At this rate, the current supply glut will continue and prices should stay within a relatively tight range. That is, however, if all other things remain constant. Of course, they do not.
The OPEC and several non-OPEC countries, most notably Saudi Arabia and Russia, have imposed production cuts since January, reducing output by around 1.8 million barrels per day. This effort helped the supply and demand equilibrium and raised the prices by a few dollars. The Saudis seem to suggest this policy could continue through the year’s end, a decision that will be finalized in Vienna on May 25th.
Meanwhile, geopolitical concerns also play a major role in oil pricing, especially when it involves conflict in the Middle East – where about 60% of the world’s oil is produced. In addition to geopolitical concerns, there is uncertainty about Trump’s domestic economic agenda. While he did sign a bunch of executive orders to roll back environmental regulations, a lack of confidence in the shelf life and reliability of many campaign policy statements seems to be lingering. With failure to repeal and replace the Affordable Care Act, the president and Congress assured that they would tackle tax reform. However, recently, the president surprised people by reversing course and stating that he wants to go back and work towards repealing and replacing the ACA. With such uncertainty, businesses and wall street are beginning to question when Trump will make good on his campaign rhetoric.
In a world of provocations and escalating situations, the wide range of price projections may well represent the gamut of possibilities driven by any one of the various scenarios coming to full fruition.