Prospect of Lower Demand and OPEC Cheating Doesn't Deter Predictions of $100 Oil

by Ship & Bunker News Team
Thursday December 29, 2016

Even though The Schork Report is yet another venue to worry about the Organization of the Petroleum Exporting Countries' (OPEC) cutback deal being rendered ineffective (due to the prospect of a high U.S. dollar stifling demand for crude oil), the latest word in the analytical community is that oil may rise again to $100.

Tim Pickering, founder of Auspice Capital Advisors, told CBC News that 2017 will be a good year for crude prices - and that's only the beginning: "Regardless of OPEC cutting 500,000 or 1 million or 1.5 million barrels and sticking to that, we're generally positive and think we're going to be on a positive trajectory here for some time.

"The supply demand balance is coming back regardless of OPEC."

Pickering sees a long-lasting "positive trajectory" for the commodity, and this compels him to reject the standard forecast of oil in the $40-$60 range; he instead pegs oil's upper potential at $100 within the next five years, adding, "oil doesn't like to stay stuck for too long."

Dovetailing Pickering's remarks is BloombergMarkets reporting that the $100 December 2018 call option was the most traded contract on Tuesday across the whole ICE Brent market; this contract, which grants the right to buy December 2018 futures at $100 per barrel, reflects the confidence of traders that OPEC will be able to rebalance supply and demand.

Ole Hansen, head of commodity strategy at Saxo Bank A/S, said, "It's clearly not the consensus in the market that we're going to see a return to those prices any time soon, so it's more likely a hedge against unforeseen geopolitical events during that time."

But Stephen Schork, editor of The Schork Report, takes into account not trader confidence or analytical predictions in assessing where the market is heading, but instead the U.S. dollar: and in this regard, he thinks the recent strengthening of the greenback coupled with expectations of strong upcoming U.S. economic growth will cause the dollar to continue to rise.

He told CNBC's Squawk Box, "If we do see continued strength in the dollar, that will have a double whammy on oil prices."

Schork is referring to the strong dollar causing lower crude demand, which in turn will make it difficult for the impending OPEC production cuts to reduce the global glut, as well as tempting OPEC members and other countries to exceed their agreed to output limits: "From a seller standpoint - from an OPEC standpoint - your propensity to cheat and increase production to take advantage of dollar-denominated sales will increase."

Presumably, Schork's outlook coming true would also be bad news for ailing oil and gas sectors such as Canada's, where the inventory of Albertan wells without an owner financially capable of cleaning them up doubled this year to 1,400, according to The Calgary Herald.

Schork also doubts the success of the cutbacks regardless of the U.S. dollar, pointing out that "if OPEC reverts to being OPEC - that is to say, 60 to 70 percent compliance - then OPEC is still going to be producing 700,000 to 800,000 barrels of oil ... more this January than last January."

And even if the OPEC cutbacks play out as planned, this could still slow glut reduction: earlier this week, Matt Smith, head of commodities research at ClipperData, argued that a successful cutback would boost prices and result in less strategic buying from China, which he views as a "really strong" source of emerging market demand.