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The U.S. has established itself as a swing producer through the phenomenal growth and develop of tight oil production. I am paying close attention to the weekly release of the Baker Hughes rig count. The number of operational rigs has been consistently increasing since the summer of 2016. It has also accelerated with the price of West Texas Intermediate (WTI) trading above $50 a barrel. This tells me that at $50 there are a number of producers ready to increase production. I must point out that this is not the case for all Petroleum Administration for Defence Districts (PADDs). The stand-out has been the Permian Basin (PAD 3), which produces just over 2 million barrels per day (bpd) of the 8.5 million bpd the U.S. produces as of December 2016. As the price rises towards $60 we will encounter the same ceiling as 2015. PADDs that are battling at $50 will be sustainable at $60 and increase production. The battle between OPEC, non-OPEC and U.S. shale will continue through 2017. It will require further production cuts to keep the market above $60. What trading opportunities am I looking for next year?

The thought of further production cuts from OPEC and non-OPEC producers will be great opportunities to go long. Simply buying into the rumours and headlines will be enough to make profitable trades. Conversely, if there is any lack of commitment from key producers like Saudi Arabia or Russia, short bearish sentiment. The longer term fundamental picture is a copy of 2015. The range between $45 and $50 is a buy and hold up to $60. The trade from $60 is dependent on further action by OPEC and the strength of U.S. production. Further OPEC cuts will be a buy and hold to see where the market runs out of momentum. If OPEC fails to take further action and U.S. production climbs above 9 million bpd. A short at $60 could be a held down to $50. Look to trade the psychological levels at $50 and $60. Buying or selling at these levels will depend on OPEC’s production reduction commitment, Trump’s influence on oil producing nations and the potential increase of shale oil.  

Michael Stapleton
Crude Oil Market Analyst
Oil Pips

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