for Goldman Sachs
From the SPR and OPEC to the trade war with China, oil traders face myriad uncertainties through the end of the year.
Two things to question no matter what the outcome: The assumption that a production agreement will benefit the market, and the promise that OPEC can moderate a price spike in the next year.
The current environment is ideal for the oil majors: Lower production costs, consolidation, and cautious spending allow them to post massive returns.
The market’s initial reaction on Monday and its losses of about $7 since the beginning of March indicate that OPEC members can’t use verbal intervention to lift prices as easily as they did last year.
If fundamentals weaken and oil market sentiment shifts, a sharp price correction is likely once investors liquidate their long positions.
Under the border-adjustment tax, U.S. oil would be exempted from taxes if it is exported abroad, making it much more competitive. The tax, however, will have difficulty passing in Congress since it would also likely raise pump prices.
U.S. independent shale companies are starting to step up their spending plans, eyeing a swift return to the shale patch as oil prices rise. Many have revised their capex upward, added rigs, and hedged production forward.
OPEC’s talk about an agreement on a production freeze in late September has dominated headlines, scaring financial investors with short positions. But more important than the rhetoric about capping production is the possibility of more supply from the cartel returning to the market.
As Canadian wildfires have failed to cause lasting damage to tar sands extraction facilities, oil markets remain calm despite the size of the disruption.
A number of supportive elements should keep a floor under prices, while the market will be capped by the ongoing oversupply. For the time being, oil markets are set to remain volatile and range-bound with many competing factors pushing prices in both directions.