Commodities, Supply Glut, is Over, fx trader, forex Gasoline

Chart 2

The oil rally has been given extra momentum by out of control wildfires in Canada and militant actions in the Niger Delta. The United States imports the majority of its crude from the tar sands of Alberta, Canada. During the second quarter of the year the region was ravaged by wildfires which reduced exports to a trickle. Traders concerned about the implications of such an event bought the market in an aggressive fashion, getting crude to the psychological $50 mark. Further gains were added when militants calling themselves the Niger Delta Avengers attacked pipelines in the Niger Delta. These attacks have reduced Nigerian oil production, the 12th largest producer, to its lowest level in 20 years. The Canadian wildfires have been extinguished and oil exports have resumed, however the situation in Nigeria looks to be around for a lot longer. The conflict in the region has been ongoing since the early 1990’s and has a tendency to flare up and dissipate. The local ethnic groups are fighting for a share of the oil revenue generated by a host of foreign companies. As long as, the Niger Delta Avengers are armed and determined to disrupt oil infrastructure the price of oil will battle to move much lower.

The oil market will trade around the $50 level through the summer months on strong gasoline demand and potentially spike up towards $54’s if Nigerian crude exports remain suppressed. Heading into the the third quarter of the year, the market should gradually pull lower to the mid-$40 range as the peak summer driving period winds down. Early weather forecasts are predicting a strong winter for 2016/2017 and this could see a strong rally in heating oil, giving crude a boost back up to the $50 level to round out the year. These moves are dependent upon United States shale production remaining at current levels and the political tensions in the Niger Delta stabilising. If either of these two variable were to move to the extreme we could see oil move up to $60 on the high side or test the $40 mark on the low side.      

Commodities, Supply Glut, is Over, fx trader, forex Oil rigs

Chart 3

The supply glut is being reduced by strong gasoline demand and disruptions to crude oil exports. The market is expected to rebalance by the end of 2017, where supply and demand will be in sync. Until then there is the possibility that shale producers will increase production and starting adding to supply. On the other hand, a prolonged political struggle could see Nigeria at reduced production levels for an indefinite period of time, supporting the market. The prospect of $30 oil is no longer a possibility with demand and disruptions gradually reducing oversupply. 

Michael Stapleton
Crude Oil Market Analyst
Oil Pips