Afternoon Market Overview

Geopolitical risk continues to elevate as protests in Iran continued throughout the week. Market participants are watching cautiously for any sign that the protest is moving toward the oil export areas of the country. So far that has not been the case.

Geopolitics were supportive for prices last week. On the external front global equities were strongly higher for the week based on positive signs coming from many of the global economies around the world including the US. If the pattern of economic growth continues global oil consumption could turn out to be higher than what most of the forecasters are currently projecting for 2018.

If so it could contribute to global oil inventories remaining in a destocking pattern throughout the year which is bullish for oil prices. Also, the US dollar was lower last week versus most currency pairs as FX traders are viewing the latest US economic data as positive but not runaway growth suggesting that the US Central bank may continue to raise short term interest rates in a very measured and cautious pattern. The weaker US dollar was a positive for oil prices last week.

The new trading year is starting on a positive note for the oil complex. As we have discussed many times throughout last year oil prices will continue in a slowly evolving uptrend if the fundamentals remain on a path to return to more normal, historical relationships. Global oil inventories have been declining for throughout most of 2017 (especially in the US) and it appears that this pattern will continue at least for the first part of 2018. OPEC and the select non-OPEC producers (Russia for one) continue to be very committed to driving global inventories back to the five-year average level and are willing to sacrifice their own production to achieve this goal.

They are losing market share as US crude oil exports have continued to grow across 2017 and are now going to many locations around the world that were previously supplied by many of the producers that are part of the production cutting accord. However, they are being reward by higher prices for the production they are still exporting from their respective countries.

It is not a given that OPEC will continue to operate at a very high compliance level (last month around 120 percent) but there are also no indications that the accord is in jeopardy.

At least from what has been circulating around the media airwaves all systems are a go for the accord to going as is for the foreseeable future.