I think they will extend production cuts beyond June. It’s important to remember that Russia and Saudi Arabia were at historically high production levels when the production cut discussions began. It is expected that they will continue to be strong proponents of the production cuts. However, my confidence in all participating parties maintaining these production cuts is very low. For example, if a participant country has a high degree of civil unrest due to political and economic challenges, it is hard to imagine that country not increasing production for badly needed income.
The main reason behind the production cuts and was to solve the global oversupply issue of crude oil. There has been some drop in global supply with the production cuts however those are offset with the increase in U.S. shale production.
I do not see the global crude oil supply dramatically changing in the next few months. However, current upward crude oil prices based on the uncertainty of geopolitical factors is hard to maintain with the reality of oversupply fundamentals. Whether they increase or decrease production parameters, I am bearish on crude oil prices. My expectation is that crude oil will trade in a $15 range from $45 a barrel to $60 a barrel over this coming year.
It should also be kept in mind that during this last drop in crude oil and U.S. production, Shale oil producers and the major oil producers have increased their efficiency and lowered their breakeven points. Therefore, if crude oil prices decrease below $40 a barrel there are a number producers that would continue to produce with breakeven levels at $30 a barrel. This means U.S. oil production would continue through lower crude oil prices.
Along with the current global oversupply, if the U.S. dollar continues to get stronger, it would be expected to add additional downward pressure on crude oil prices.
As a trader, these fundamental factors create volatility and volatility can set up price action trading opportunities.
Dan Gramza is President of Gramza Capital Management Inc. and DMG Advisors, LLC. He provides daily market updates from around the globe on subjects ranging from the Nasdaq and currencies to crude oil and grains at dangramza.com.