The energy traders have an exciting time lately in an otherwise boring December. Brent Crude oil prices managed to break out mid-40 trading range to mid-50 from two major events.
One geopolitical event is that China has seized an US unmanned vessel. This followed the already tense relationship due to President-Elect Trump’s phone call with Taiwan’s president, breaking the decades-old “One China” policy of not recognizing Taiwan’s government. Taiwan has been considered a renegade providence of China. Trump’s claim that One China policy can be used a bargaining chip in trade talks, while elicit a potential forceful response and endanger an annual trade relationship close to $650 billion.
While traders may look for any excuses for market volatility, the geopolitical events generally have short-term effects. Amid the most recently vessel incident, the US 10-year Treasury rate inched down slightly, as considered the safe haven. This in turns lowered the US Dollar Index and spurred the oil price. For the portion that the oil price increases derived from the volatility of the interest rates and currency values, but not from the fundamental sides, is not expected to have a long-last impact.
That being said, the one fundamental factor which has driven the oil prices up came from the changes in both the oil supply and demand. For the supply side, OPEC reached a landmark agreement, one month ago, to cut the daily production for the member countries. It is estimated that this agreement alone should bring the price to $60 a barrel in 2017.
One more optimism, to boost the future oil prices, came from the unexpected participation from the non-OPEC countries’ proposed cut in production. The largest of non-OPEC oil producing countries, Russia, proposed to cut 300,000 barrels a day. The surprised move is further aided by several other non-OPEC countries all chipped in an additional 258,000 bpd in reductions from Mexico (-100,000), Azerbaijan (-35,000), Oman (-40,000), Kazakhstan (-20,000), Malaysia (-20,000), and more cuts from Bahrain, Brunei, Equatorial Guinea, Sudan and South Sudan.
In fact, the oil market is more impressed by the wide spread voluntary reduction in oil supply which reflects the overall favorable outlook of OPEC and non-OPEC countries for future global economic growth. Many market watchers believe that if the near-term economic growth in the first half of 2017 reduces the stockpile and inventory of oil, the current oil price increased can be further extended from then on.
The target for 2017 and beyond is around $70 a barrel.