Is Oil Price backtracking to Doldrums?

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Australian Economy, European Economy

The price of oil has been seen to climb in the past few months, despite record-high U.S. production this year. Brent crude oil prices settled at slightly higher levels earlier this week after a volatile session in which concerns on potential shortfalls in supply were raised with respect to Venezuela and Iran. Then, US President Donald Trump expressed his displeasure on US-China trade talks and this turned the situation in a different direction. With this, Brent futures rose 35 cents to settle at $US79.57 a barrel, a 0.44 per cent gain; and as at reports on May 23, 2018, Brent crude was up 0.2% to $US79.75 a barrel. On the other hand, US oil slipped by 0.6% to $US71.80 a barrel. Last week, the global benchmark topped $US80 for the first time since November 2014. US West Texas Intermediate (WTI) crude futures fell 11 cents to settle at $US72.13 a barrel, a 0.15 per cent loss. They earlier touched $US72.83 a barrel, the highest since November 2014.

However, with the threat from the step up in production coming in from OPEC members on Thursday, benchmark Brent futures slipped down to $79.53 per barrel and U.S. West Texas Intermediate (WTI) crude futures dropped to $71.67 a barrel.

Trump’s latest remarks on trade talks between the United States and China with door open for further negotiations, was a big topic for discussion with many believing that trade is positive for energy demand. Further, with the collapse of oil prices in 2014 at the back of US shale production, a new-found belief that prices would remain lower for longer prevailed. However, investors are now on their toes considering the speculation related to any rise in oil output starting from June as Russia and Saudi Arabia have some upcoming talks lined up to easing the output cut.

The heavy build-up in inventories in the United States, at the same time, has started hurting the prices. It is reported that domestic stockpiles have advanced by 5.8 million barrels last week (as per Energy Information Administration).

Amidst this volatile scenario, BHP Billiton Limited (ASX: BHP) is a key resource stock that has benefitted by the recent oil prices and rose up by 21.2% in last six months. Various US stocks to the likes of Chevron were also rising up on the cup base post offering entry opportunities.

However, the changing landscape is not in consensus with the earlier known concept of a ‘shale price band’ within which the majority of US shale producers could turn a profit without the risk of the industry growing so fast, and the concept now seems to be crumbling under the various geopolitical scenarios. The yester-years inventory fall found support from strong demand growth and the Opec/non-Opec deal to curtail output since January 2017. But the latest imbalance with US inventories on high and declines in Venezuelan and Angolan production is bringing oil prices on doldrums. It is worth a watch whether the themes that emerged with investors relying on new-found interest in exposure to energy and narrative dominated by electric cars are there to stay and alter the trajectory for global oil demand in the long term.


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