Will crude prices cool off or rally ahead? Opec+ holds all the aces
Opec and its partners want to withhold oil in 2019 to tighten supply and prop up prices.
The main theme of the market was oil oversupply worry from the US, Saudi Arabia and Russia, which produced more than 11 million bpd a day this month, a record high. That’s more than the combined output of the rest of Opec countries.
The troika accounted for 36 million barrels per day of crude and condensate production in 2017 (39 per cent of the global total) compared with just 27 million bpd from the rest of Opec (30 per cent of the global total). Increases in output from Opec producers, Russia and the US have more than offset falls in Iran and Venezuela.
Concerns that oil demand growth may hit a soft patch due to higher prices and weaker global growth weighed. The only bullish factor was the intention of Opec to reduce the output to bring balance in the markets.
After US crude oil went below $50 for first time in over a year, reports surfaced that Russia would consider joining Opec and other producers to slash output.
Brent-WTI spread widened and traded near $8 for the first time since late August, reflecting that US inventories and production continue to rise. Brent inventories have been somewhat reduced by the sanctions against Iran. The falling crude prices and futures curves flipping into contango indicate that the market has loosened in the past month.
Opec digs in its heels
It looks like Trump removed all the bullish sentiment after his recent tweets where he has expressed the need for Saudi Arabia to keep prices stable and not go for any output cuts in the Vienna meet. The market seems nervous at this point as investors are forecasting that there won’t be any major output cut to remove the oversupply.
On the other hand, oil got some support after Russian minister expressed a willingness to join Saudi Arabia in curbing global supplies. Right now, Opec is struggling under sanctions, mismanagement and unrest, maximising production rather than participating in output controls or simply aligns its output policies with those of Saudi Arabia.
The only Opec member that operates an independent production policy and has been able to increase its output significantly in 2017-18 has been Iraq. To add to the bearish momentum, Qatar, which is Opec’s 11th-biggest oil producer, accounting for less than 2 per cent of the total output, is planning to leave the bloc by January 2018. That is most significant for any potential impact on the group’s cohesion. The likely withdrawal comes as non-Opec countries such as Russia have become more influential in setting oil policy alongside Saudi Arabia, which is the largest producer within the cartel, and its de facto leader.
IEA Monthly Report
The main catalyst was huge submergence in crude prices was the monthly report from IEA and Opec. The report painted a negative picture for crude by keeping demand unchanged for the next quarter and forecast global crude supply to increase rapidly.
The IEA welcomed the oil market’s return to surplus as Opec’s production surge swells global stockpiles and drives prices into a bear market. It warned IEA that high energy prices could present risks to global economic growth.
Yet a production push in Saudi Arabia, Russia and the US as well as the US waiver for some buyers of Iranian crude have provided the market with a buffer to potential supply shocks. Stockpiles increased against the seasonal norm and are likely to exceed the five-year average for the first time since March once October’s figures are finalised.
The market seems to be in a confused territory with supply outages and limited spare capacity threatening to send prices up, which would endanger global economy. The signals from Opec and its leader, Saudi Arabia, have been mixed.
Saudi is expected to trim production, but on the other hand, Saudi oil output exceeded 11 mbpd for the first time in November. Even US crude production rose to an all-time high of 11.5 mbpd surpassing Saudi Arabia’s, the latest indicator of a wave of onshore US production that has weighed on global markets.
The continuous rise in US crude inventories and slowdown in demand might even amount to leading indicators of returning supply surplus. The inventory from US showed continuous rise for the whole month, with US driller adding new rigs, the highest since 2015.
Libya’s output has skyrocketed in the latter half of the year to its highest level in more than five years, reaching 1.28 million barrels per day as reported in November, more than double its June production of 500,000 bpd.
The only supportive factor for crude was the easing of tensions between US and China where the former agreed to leave tariffs on more than $200 billion worth of Chinese products at 10 per cent. If both are unable to reach an agreement after 90 days, that rate will be raised to 25 per cent.
On the other hand, China agreed to purchase substantial but not-yet-determined amount of agricultural, energy industrial and other US products to reduce the trade balance between the two. This has reduced the concerns of slowdown in demand by China and can be bullish for crude oil prices.
Natural gas prices surged to the highest since January, mostly driven by lower inventories heading into the peak demand winter. Short-term forecasts have come out on the bullish side because of expectations of pair of short-term cold snaps.
On the inventories front, we saw drawdown in inventories which was much lower than expected except in October 16 week, where we saw huge drawdown due to demand spike. The trend remains negative as forecast indicated a mid-December break from cold temperatures across much of the country.
Oil markets are nervously eyeing Opec’s upcoming meeting on Thursday for clarity on future supply as the dust settles after a full-fledged rout in crude markets over the last several weeks. It looks like markets are in wait and watch mood to get clarity about Opec output cuts.
Ahead of the Opec meeting, the market looked for the cartel and its allies to reduce production by 1 mbpd. With Russia apparently agreeing to go along with the Opec-led production cuts, a change in the fundamentals may be close to reality.
We have to wait and watch the decision in Vienna to decide the course of crude oil. Any output cut less than the expectations of 1-1.4 million barrels will drag WTI prices back to $48-45 whereas any positive news of higher cut will bring rally for WTI prices to touch $68-60 soon.
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