Oil Price - Jan. 6

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Oil prices ended the week slightly up from where they started, following a few rocky days of trading. After a sharp correction earlier in the week, oil regained ground on a steep fall in crude oil inventories. Still, the gains would have been much larger if not for the fact that U.S. gasoline stocks rose sharply. Nevertheless, oil is starting off the year on a positive note, and early signs of OPEC compliance with their agreement to cut production are buoying the market.

Saudi Arabia says that it is already complying with the OPEC deal. Saudi Arabia offered encouragement to oil traders this week when it announced that it is lowering its output to 10.058 million barrels per day (mb/d) in January, complying with its promised cuts laid out in the November OPEC deal. OPEC members are required to bring their six-month average production levels to the targeted range, but Saudi Arabia said it will meet that level immediately. The announcement adds credibility to the deal and raises the likelihood that other members will comply with their targets.

Second quarter to see tightest supply conditions. The second quarter of 2017 appears to be the period of time in which the global oil market will experience its tightest conditions: Other OPEC members will ratchet down their production levels to comply with the deal; non-OPEC countries including Russia will lower output; U.S. refineries will begin to ramp up operations to meet summer driving demand; Middle East countries such as Saudi Arabia and Iraq burn more oil in warmer months; inventories will decline as supply drops; plus underlying growth in oil demand continues to soak up excess supply. Many oil analysts expect oil prices to rise the most in the first two quarters of 2017.

Raymond James issued a new oil price forecast on January 3rd. RJ believes WTI will sell for $75/Bbl in the 2nd half of 2017, then settle in the $60 to $65 range in 2017.

Speculative bets on rising oil prices continue to increase. Oil speculators continued to add bullish bets on oil prices at the end of 2016. For the week ending on December 27, bullish positions rose by 7 percent to 358,573, with the current makeup the most net-long since 2014. Long bets outnumbered short positions by a factor of 35 to 1, the WSJ reports. That sets up the market for downside risk if bearish news emerges in the coming weeks. If speculators get spooked, they could begin to unwind their positions rapidly, leading to a sharp correction in oil prices.