Crude oil prices popped last November due to a supply cut negotiated and implemented by many of the world's largest oil producing countries.
Since that time, oil prices have remained steady with West Texas Intermediate (WTI) and Brent Crude (two of the most widely known benchmarks for oil prices) hovering around $53 and $56, respectively.
Looking into 2017, there are a couple important themes that could impact the price of crude oil in the coming year. Additionally, there are some potential developments that could even shake-up some of the paradigms that have existed in the commodity for a long time.
Given that oil is one of the world's most widely traded commodities, it's important that traders are aware of what may unfold in the coming year.
One thing to check out is worldwide oil production numbers for January 2017, released this week. This report is especially important for January of 2017 because that was the first month that producers involved in the OPEC-led deal were scheduled to cut back on production.
Energy investors and traders waited eagerly to see which countries complied with their quotas for decreasing production and what impact the overall cuts could have on total worldwide production.
Press releases throughout January of 2017 from countries participating in the deal suggested that the cuts are being implemented as promised, but evidence of this couldn’t be confirmed until the statistics were released this week.
Beyond the crude oil production numbers, another important topic to follow that could also significantly affect energy prices is tax reform in the United States. President Donald Trump has spoken at length about his intention to improve tax policy in the United States as well as renegotiate many of the country's international trade deals.
The one item that could really shake-up worldwide energy markets would be a change to the US border-adjusted corporate tax (often referred to as simply the border adjustment tax). At the most basic level, raising the border-adjustment tax could mean that the cost of importing oil into the United States would immediately go up.
Because it could also exempt from taxation US business revenue derived from exports, it may also catalyze a quick uptick in the amount of crude oil that US producers send abroad.
The potential changes look so significant that some of the world's leading financial institutions believe it could even “transform” the world energy market. According to CNBC.com, Goldman Sachs anticipates "a 25% jump in the prices of US crude futures, also known as West Texas Intermediate (WTI), and refined products in comparison to the global prices if the switch is implemented."
Goldman’s forecast would effectively move WTI to a $10 premium over Brent Crude, as compared to the relationship between the two that has existed for quite a while (Brent Crude currently trades at roughly a $3 premium to WTI).
It's important to keep in mind that the exact details of the potential border tax adjustment aren't yet known, and that some estimates suggest only a 30% probability that this particular policy change will ultimately be implemented.
For now, the most important thing that investors and traders can do is to monitor the news for announcements related to OPEC as well as the US border-adjustment tax. Depending on your strategy and approach, some traders may also seek to reduce risk in their portfolios until more information is available.
If you want to learn more about the relationship between WTI and Brent Crude, and how to access these products for trading, a recent episode of Closing the Gap: Futures Edition may be of interest.
If you have any questions about trading crude oil futures, or any other product, we hope you'll reach out at firstname.lastname@example.org.
We look forward to hearing from you!
Sage Anderson has an extensive background trading equity derivatives and managing volatility-based portfolios. He has traded hundreds of thousands of contracts across the spectrum of industries in the single-stock universe.