The oil market is performing as expected so far in 2017.
The oil market is performing as expected so far in 2017.

Heading into 2017, speculation about oil’s future was the name of the game, despite much of it being premature. The Federal Reserve had just increased rates for only the second time in a decade to close out 2016, the unexpected upset in the presidential election sent shockwaves through markets and OPEC was still working out the kinks of its production cut deal. This nexus of factors created a whirlwind of abrupt market movements and overall uncertainty.

However, with analysts already looking toward February and March, it appears the oil market has stabilized and is trending in precisely the pattern that most expected prior to the many macroeconomic circumstances that occurred all at once in Q4 2016.

On the whole, the market is tightening, as CNBC reported. Inventories continue to drop, prices are rising and future of global oil policy is starting to come into clearer focus.

Inventory levels declining albeit with a few hiccups
CNBC noted that in recent weeks, crude stockpiles have actually risen unexpectedly, though the larger trend has still been downward. These hiccups can be attributed to a lack of a standardized methodology for reporting and recording stockpiles. Additionally, much of the numbers can be weeks or months old by the time they are officially released, painting a somewhat inaccurate or outdated picture of real-time occurrences.

According to MarketWatch, an increase in U.S. activity may have contributed to small blips of higher inventory levels. On the other side of the spectrum, recent output figures from OPEC have indicated the oil cartel is actually following through on its promise to curb production. In a matter of weeks and months, this drawdown should be reflected in lower inventory levels.

As global stockpiles continue to fall, the oil market will normalize further, propelling prices up, benefiting the health of the marketplace as a whole.

Prices should continue to arc upward
Similar to inventory, prices have undergone small moments of variation, but overall are trending up, another good sign for oil companies. In recent days, Brent crude has climbed between 30 and 40 cents, as has West Texas Intermediate, according to CNBC.

Both benchmarks are above $50 per barrel, with companies expecting that number to hit $60 or more by the end of the year.

As production cuts from OPEC and Russia take hold, prices should begin to tick up more quickly – at least as the current oil environment stands.

Could economic expansion throw a wrench into future performance?
The one elephant standing in the way of a sustained and significant price rally is a fast-growing U.S. economy, which is expected to pick up even more in the months ahead.

On the horizon for investors and oil companies are proposed corporate tax cuts, higher oil investments and eased sanctions with one of the largest producers and exports of oil, Russia. Additionally, wages are up, unemployment is down and consumers are seeing their best economic performance in over a decade. This is all great news certainly.

Except when it isn’t.

With such a strong record of economic growth under its belt, the U.S. economy must also face the fact that borrowing is soon to become more expensive, and will continue to be for many years.

The Fed is plotting to increase its federal funds target range by 0.25 percent three times in 2017. It has also indicated rate hikes in 2018 as well. By that point, interest charged on conventional loans could be twice as high as their present-day rates. While still relatively low (in the 2-3 percent Fed range), higher rates could make business transactions cost more, forcing investors and owners to rethink their purchasing and growth strategies.

Further, The Wall Street Journal astutely pointed at that higher rates in the U.S. would push the value of the American dollar up. This makes it more expensive for nations and businesses that don’t use the dollar to trade with the U.S. or purchase U.S.-made products. This could have the impact of putting a ceiling on oil prices, making it less feasible for a price rally to occur.

“Rising interest rates are certainly a risk for the oil market this year,” said Tom Pugh, an analyst for Capital Economics, the Journal reported. “With Trump possible embarking on a policy of fiscal expansion, we should see a real increase in interest rates this year and a higher dollar — all headwinds for oil prices.

Weighing these opposing forces against each other will be front and center of the oil debate in 2017.