2017 could prove to be a very interesting year for oil. With a production freeze by some countries driving up prices on one hand, and increased production by other countries keeping a lid on prices on the other – this year presents a unique situation for the black gold market. Since the global economy is heavily dependant on oil, it is always in constant demand, and will still present different opportunities for traders this year, and in years to come.
The world runs on oil. Everything from the energy industry to the transportation of goods is dependent on oil and oil products, and it is also used to create materials such as plastic. It is no wonder then, that it is the most traded commodity in the world, and has become an indicator of wealth for many countries. However, despite being in high demand, it is also being produced rapidly, resulting in an oversupplied market. In 2016, the global glut pushed prices down to a 12-year low, which forced producers to take action.
Understanding the forces fueling the market
In 1960, the Organization of Petroleum Exporting Countries (OPEC) was founded, creating a powerful body of oil producers who can collectively take measures to influence the oil market. Today, there are 13 OPEC member countries, which hold roughly 80% of the world’s oil reserves. Since it is such an influential force in the oil market, the organization can, and does, take action to manipulate prices.
After much debate throughout 2016, a global production slowdown agreement came into effect in January 2017. For this historic agreement, OPEC successfully recruited non-OPEC countries, such as Russia, which is the world’s biggest oil producer. The aim of the production freeze was to reduce the global glut and drive prices back up. However, since oil is still an open market, countries that were not in the agreement saw this as an opportunity to ramp up production and fill the void.
Where is oil heading in 2017?
From a trading standpoint, oil is still an interesting investment opportunity, since much of the forces which drive prices can be seen quite easily. The production freeze was initially planned for the first half of 2017, but it could continue into the second, and perhaps for the entire year. If this will be the case it will mean that the chance of prices dropping rapidly is very low. At the same time, opportunistic countries will most-likely continue to increase production, which could keep the lid on prices at their current position.
However, the oil market is huge, and there are always events that could cause a sudden shift in price. President Trump’s approval of two major oil pipelines in early 2017 mean lower export costs for Canada and the US, which could mean even lower prices for oil and an increase in oversupply. As 2017 progresses, it will be interesting to see if the narrow price margin will be breached, and which of the forces will eventually determine the outcome.
Either way, this year is sure to present many opportunities for oil traders and investors, and those who could accurately predict where oil prices will head next will make a profit.