Oil prices rise on weaker U.S. dollar

WTI Crude Oil

The recent events in Libya described above, as well as others which have disrupted crude flows and caused prices to rally, have been sent to clients as "Impact Alerts".

Goldman Sachs raised its three-month forecast for Brent to 75 dollars from 62 dollars and its six-month forecast to 82.50 dollars from 75 dollars. US oil prices are hovering near $66 a barrel, well below the 2014 peak of $107 a barrel, but more than $20 a barrel above the $42 in mid-2017.

Oil rose on Thursday after a survey showed OPEC's commitment to its supply cuts remains in place, even as U.S. production topped 10 million barrels per day (bpd) for the first time since 1970. Others, including UBS Group AG and Societe Generale SA, said last month that OPEC and Russian Federation should wind down the strategy earlier than scheduled, phasing out the cuts from the middle of the year.

Brent futures, the global benchmark, were down 8 cents at $69.57 a barrel by 1104 GMT. Analysts had expected a decrease of 126,000 barrels.

One overlooked factor that lends additional weight to that assessment is that the oil market is bigger than it used to be. So what constitutes "average" should also be at a higher level.

OPEC members are enjoying the extra income, though some in the group have expressed concern that it could encourage USA shale and other supply from outside producers. Over the same period, regional crude oil inventories increased by 6.9 million barrels.

These worries had a solid basis: Drilling in the United States is indeed booming, and now Canadian drillers are also moving south to respond to the demand for new wells. Labor costs increased because of a 1.8 gain in wages, while hours worked increased by 2.1 percent.

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An increasingly correlated trade between oil, stocks, bonds and the dollar has amplified swings in the markets. The stronger backwardation provides investors with even stronger returns when they go long on oil, allowing them to roll over contracts on a monthly basis.

With the oil market much more precariously balanced than it was just six months ago, geopolitical events and supply outages are having a much more profound impact on the oil market.

So, OPEC is stuck with the deal, raw as it may be, especially as members such as Saudi Arabia and Kuwait plan hefty oil investment programs for the medium term.

"With low and declining inventories in key commodity markets, we expect commodity price volatility will rise from the current historically low levels". Gulf oil production rose to about 1.7 million barrels in November and it's projected to hit a record of 1.9 million barrels per day this year.

The group will likely try to come to some arrangement to avoid an aggressive ramp up in production.

But as with so many crude gains and losses, Thursday's performance seems triggered nearly by primal reaction rather than sound reasoning: John Kilduff, founding partner at Again Capital, pointed out that the high compliance is not so much an indication that OPEC members are willingly cutting their output but rather "a reminder of the stark decline in output in Venezuelan oil output".

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