Crude to Face Headwinds from Strong Dollar, US Shale

Economists estimate Brent crude futures to average at $57.43 a barrel in 2017

o1Oil prices are expected to gradually increase toward $60 per barrel by the end of 2017, according to Reuters on January 03rd, 2016, after the Organization of Petroleum Exporting Countries (OPEC) closed a deal to cut oil production in an effort to prop up global crude oil prices on November 30th, 2016. However, oil prices could remained capped at $60 per barrel due to headwinds created by a strong dollar, a likely recovery in US oil output, and possible non-compliance by OPEC with agreed cuts.

Brent crude futures are likely to average at $57.43 a barrel in 2017, according to economists polled by Reuters. Average Brent prices are expected to improve with each subsequent quarter, starting with $53.88 in the first quarter of 2017, to $56.61 in the second quarter of 2017, $58.79 in the third quarter of 2017, and $59.68 in the fourth quarter. Brent has averaged about $45 per barrel in 2016.o2

After the OPEC clinched a major deal to normalize record global oil inventories, crude oil prices have been on the rise when members agreed to its first production cut in eight years. Since the September 2016 meet, crude oil prices have been trading near $48 per barrel, up from under $30 a barrel at the start of 2016, but well down from the years when it was above $100 a barrel, before dropping off in mid-2014. OPEC will reduce output by about 1.2 million barrels a day from January 2017, fulfilling a plan sketched out in Algiers in September 2016 to cut its production to 32.5 million barrels per day (bpd) from the current levels of around 33.24 million bpd. In addition, non-OPEC oil producers including Russia have agreed to cut production by 558,000 barrels per day.

The sustenance of elevated crude prices will however depend on how strictly OPEC members will stick to the agreement reached on November 30th, 2016, something that they have not always done in the past. Meanwhile, economists have warned that crude oil prices could recede over the next few months as other producers, especially US shale drillers, are standing ready to fill the supply gap. US crude production has already risen by more than 3% in 2016 to 8.7 million bpd, as its drillers have slashed costs in an effort to compete in a lower price environment.

Will oil sector gain from Trump’s tax reforms?

In 2017, major oil companies could gain a blanket against a Republican proposal to tax imports, thanks to President-elect Donald Trump full support to remove regulations that may hamper the industry. House Republicans are seeking to implement sweeping tax reforms that would sharply reduce tax rates for corporations and end the taxation of US corporate overseas profits. However, since US oil refiners import about half the crude oil they use to make gasoline, diesel, and other products, analysts say the change could lead to higher gasoline prices and potentially undermine economic growth.

Integrated oil companies such as Exxon Mobil Corporation (NYSE: XOM), Chevron Corp. (NYSE: CVX), BP PLC (NYSE: BP), Royal Dutch Shell PLC, and ConocoPhillips Co. (NYSE: COP) could also be hit, depending on whether they are net importers. More importantly, the move to protect the oil refiners could hurt other industries, including retailers and automakers, which would also face higher costs.

Moreover, some economists predict that the dollar’s rise in response to such sweeping tax changes could ultimately reduce the cost of imports. Tax deductions for domestic production lets oil producers pare down their corporate tax rate to 32% from the top headline rate of 35%. Under the congressional Republicans’ plan, the corporate rate would be cut to 20%; under Trump’s plan, to 15%. While Republicans would eliminate foreign taxes, Trump would seek to maintain taxation at a much lower rate. Overall, Trump’s efforts to boost production may hurt oil companies by increasing the supply glut that caused prices to crash in the first place.

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