Don’t be fooled by the market reaction: Opec’s widely anticipated decision in Vienna to extend the production cuts that were agreed to back in November 2016 should prove bullish for crude oil prices.
Traders may be unimpressed, pushing prices down more than 5 per cent to below $49 (Dh179.8) a barrel in New York, but Opec’s gradual expansion and broader coordination with non-member countries is clearly giving the group more leverage in global crude oil markets.
The cartel, together with Russia and other non-members, agreed to rollover their agreement for nine more months after last year’s deal failed to eliminate the global inventory overhang. So why am I bullish?
Consider that the 24 countries that signed on to the production agreement today produce around 55 per cent of global crude oil. And there has been strong monitoring and compliance following that November agreement, also reached in Vienna.
This compliance and coordination is likely to pay off in the form of higher oil prices.
Yet, despite the greater group cohesion of the intentionally price-supportive oil production policy, both Brent and West Texas Intermediate crude oil prices fell ahead of — and following — the anticipated decision to keep Opec and non-Opec oil production at the reduced Vienna Agreement levels through April 1, 2018.
The move in oil prices conveyed disappointment, as some market participants may have been expecting a policy surprise that would have been bullish for crude. That happened at the last Opec meeting, when oil prices fell ahead of the November 2016 Opec decision before rallying on a price-bullish policy decision surprise that included a last-minute agreement with non-Opec oil producing countries.
Now that the Opec meeting is over, the market’s attention will quickly turn to rising demand. And there are two competing demand factors at our doorstep: the US summer driving season and the trend of global oil demand growth. The US summer driving season is likely to be the biggest in history in terms of gasoline demand.
The driving season is already the biggest seasonal source of global oil demand growth in the world, and with the 12-month moving average of total miles driven up by 1 per cent year-over-year through March — and US unemployment at the lowest level in almost a decade — there’s ample reasons to be bullish about US summer driving.
Beyond the potential upside from seasonal US summer driving demand, another critical data point traders will be watching as barometers of global oil demand growth are Purchasing Managers’ Indices. And three of the most important PMIs will be released: the Chinese Caixin Manufacturing PMI, the Eurozone Manufacturing PMI and the US ISM Manufacturing Index.
All three conveyed growth in April, although the Chinese and US PMIs showed a deceleration of manufacturing activity.
These three PMIs in concert speak volumes about global growth, and for monthly moves in oil prices, the Chinese PMI are the most critical data point. This is why a sharp deceleration in the April Chinese Caixin PMI weighed on oil prices in early May.
The next release of this critical data point will come June 1 local time. An improvement in the May Caixin PMI would support oil prices, but a decline would likely weigh on them.
However, even if the May Chinese Caixin Manufacturing PMI weakens further, modest improvements for China are likely on trend, which should support average oil prices over the next two years even if the market ends lower today.
