Crude oil market to adopt wait-and-see approach, stays alert on production cuts

Crude oil in recent weeks has been seeing roller- coaster- like price movement, with all eyes on the first joint production cuts from Organisation of Petroleum Exporting Countries (OPEC) and non-OPEC countries since 2001.

January 1 marked the official start of the deal which was agreed by OPEC and nonO-PEC member countries such as Russia in November 2015 to curtail oil production by working hand-in-hand on the cut of nearly 1.8 million barrels per day.

It aims to ease the global oil glut that has been eroding revenues and causing unrest in some countries, targeting to rebalance the market.

As of January 11, oil stockpiles surprisingly rose 4.1 million barrels to 483.11 million barrels.

To some extent, it might not be unusual to have large inventory builds as refineries are seasonally building fuel stockpiles before performing their seasonal maintenance.

The crude price rallied by more than two per cent on that day, despite bigger-thanexpected US crude and fuel inventories, mainly driven by weakened US dollar and Saudi Arabia’s supply reductions in February to a handful of Asian refiners.

Saudi Arabia’s commitment to reducing oil production had once again boosted the market’s confidence in their attempt to curb a global oversupply that has depressed prices for more than two years.

The country will be in strict compliance with the global output cut commitment, expressing its confidence that OPEC’s plan is feasible in propping up prices, says Saudi Energy Minister Khalid al-Falih on January 16.

However, he added that producers would unlikely extend the output reduction deal beyond six months, especially if the situation reaches a point where global inventories fall to a five-year average.

Inevitably, traders are sceptical of production cuts from OPEC and non-OPEC countries.

The data from Energy Information Administration (EIA) showed a larger-thanexpected increase in crude inventories, which soared 2.3 million barrels last week, in tandem with an increase in gasoline builds.

Year to date, the crude has entered into a trading range around US$50 to US$55.24, its high of which had once touched on the first trading day on January 3, 2017.

For first half of 2017, crude oil is largely expected to move along with sentiments from market as any progress in the output cut deal is believed to have knee-jerk effects on prices.

The market might adopt a wait-and-see approach, staying alert on the progress of the deal and global crude oil inventories.

Now, the focus should be on the weekend meeting, which is the compliance with the agreement which will be held in Vienna on January 21 to 22.

Moving forward, there is another round of meeting between OPEC and non-OPEC in May, whereby the decision on whether to extend the output cut measures, will be once again the limelight of the global market.