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OPEC appears to have persuaded investors that it’s making good on promised production cuts.
Money managers are the most optimistic on West Texas Intermediate oil prices in at least a decade as the Organization of Petroleum Exporting Countries and other producers reduce crude output. Saudi Arabia has said more than 80 percent of the targeted reduction of 1.8 million barrels a day has been implemented. Oil shipments from OPEC are plunging this month, according to tanker-tracker Petro-Logistics SA.
“All the signs are pointing to a pretty significant OPEC cut,” Mike Wittner, head of commodities research at Societe Generale SA in New York, said by telephone. “Until this week we were only getting data from the producers, now the tanker traffic seems to be supporting this view.”
OPEC will reduce supply by 900,000 barrels a day in January, the first month of the accord’s implementation, said the Geneva-based Petro-Logistics. That’s about 75 percent of the cut that the producer group agreed to make. Eleven non-members led by Russia are to curb their output in support.
Hedge funds boosted their net-long position, or the difference between bets on a price increase and wagers on a decline, by 6.1 percent in the week ended Jan. 24, U.S. Commodity Futures Trading Commission data show. WTI rose 1.3 percent to $53.18 a barrel in the report week. The U.S. benchmark slipped 1.1 percent to $52.57 at 10:52 a.m.
OPEC members Saudi Arabia, Kuwait and Algeria have said they’ve cut output this month by even more than was required, while Russia said it’s also curbing production faster than was agreed. Saudi Energy Minister Khalid Al-Falih said Jan. 22 that adherence has been so good that OPEC probably won’t need to extend the accord when it expires in the middle of the year.
Shale Headwind
The OPEC-engineered price rally has spurred a surge in drilling in the U.S. shale patch. Rigs targeting crude in the U.S. rose by 15 to 566 last week, the highest since November 2015, according to Baker Hughes Inc.
“There’s one headwind in the oil market: increased U.S. shale production,” Jay Hatfield, a New York-based portfolio manager of the InfraCap MLP exchange-traded fund with $175 million in assets, said by telephone. “U.S. output in 2017 will be 1 million barrels a day higher than last year.”
U.S. crude production climbed to 8.96 million barrels a day in the week ended Jan. 20, the highest since April, according to the Energy Information Administration. That’s already closing in on the EIA’s latest 2017 output forecast of 9 million barrels a day that was issued Jan. 10.
The net-long position in WTI rose by 21,429 futures and options to 370,939, the most in data going back to 2006. Longs rose 3.7 percent to a record high, while shorts slipped 11 percent.
In the Brent market, money managers reduced the net-long position by 3.1 percent to 448,352 during the week, according to data from ICE Futures Europe. Longs slipped, while shorts rose.
In fuel markets, net-bullish bets on gasoline fell 3.4 percent to 61,511 contracts as futures decreased 1.5 percent in the report week. Money managers increased wagers on higher ultra-low sulfur diesel prices by 1.3 percent to 34,978 contracts, while futures slid 0.4 percent.
“For the time being the market is more focused on the OPEC cuts than about how fast U.S. shale drillers are returning,” Wittner said. “There may come a point soon when the support provided by OPEC will be outweighed by the prospect of rising U.S. production. When that happens there will be a big shift in investor sentiment.”
Copyright: Bloomberg
Oil fell to its lowest in three months on Monday, as the prospect of another year of oversupply and weak prices overshadowed chances that Opec will reach a deal to cut output.
Donald Trump’s surprise win in last week’s US presidential election boosted the dollar and stocks but undermined oil. Crude has also fallen because of waning expectations that the world’s largest exporters will agree to reduce production this month.
Brent crude futures fell 50 cents on the day to $44.25 a barrel by 2:50pm GMT, while NYMEX crude futures dropped by 57 cents to $42.84 a barrel.
“In the same way that a strong Opec agreement was needed to continue the rally above $55, a lack of agreement will be needed to break below $40 and right now, we’re at $45,” Petromatrix strategist Olivier Jakob said.
Opec plans to cut or freeze output, but analysts doubt the group’s ability to reach an agreement at its meeting on 30 November.
Opec said on Friday its output hit a record 33.64 million barrels per day in October, and forecast an even larger global surplus in 2017 than the International Energy Agency (IEA) on Thursday.
Yet, Saudi Energy Minister Khalid al-Falih has said it was imperative for Opec to reach a consensus on activating a deal made in September in Algiers to cut production.
“Opec know what needs to be done but too few members will agree to take the production pain for the price gain, knowing also that the price gain incentivises non-Opec to produce more, lengthening the rebalancing process,” PVM Oil Associates analyst David Hufton said.
The dollar index hit an 11-month peak on Monday, driven by an aggressive sell-off in bonds that has pushed Treasury yields to their highest since January.
Ordinarily, a strong dollar would push oil lower, but the correlation between the two is at its most positive in two months, suggesting they are more likely to move in lockstep with one another than in opposite directions.
Data from the InterContinental Exchange on Monday showed investors delivered the largest weekly cut on record to their bets on a sustained rise in the price of oil.
Oil traded near $44 a barrel in New York amid a broader market rally driven by speculation Hillary Clinton’s chances of winning the U.S. election increased after the FBI said her handling of her e-mails wasn’t a crime.
Futures rose as much as 2.1 percent in New York following the Federal Bureau of Investigation’s report. The S&P 500 Index was set for its biggest gains since June and the dollar rose against its peers for the first time in seven sessions. Russia, the world’s biggest energy producer, is “on board” with an OPEC agreement to limit crude oil production to help re-balance the market, according to OPEC Secretary General Mohammed Barkindo.
“The U.S. election is front and center in all the markets,” said Chris Kettenmann, chief energy strategist at Macro Risk Advisors LLC in New York. “There was talk over the weekend of Russia agreeing to limit production in cooperation with OPEC, but we need to see a resolution from the Nov. 8 vote before the focus shifts to Nov. 30.”
Oil retreated below $45 a barrel following the failure of the Organization of Petroleum Exporting Countries to agree on output quotas for member countries on Oct. 28, which must happen before a deal can be finalized. OPEC pumped at a record rate in October, according to data compiled by Bloomberg.
West Texas Intermediate for December delivery rose 32 cents, or 0.7 percent, to $44.39 a barrel at 11:26 a.m. on the New York Mercantile Exchange. The contract slid 59 cents to $44.07 on Friday, the lowest close since Sept. 20. Prices fell 9.5 percent last week, the most in almost 10 months.
Election Focus
Brent for January settlement rose 4 cents to $45.62 a barrel on the London-based ICE Futures Europe exchange. Prices declined 8.3 percent last week, the most since January. The global benchmark traded at an 68-cent premium to January WTI.
“The stock market is up on the increasing likelihood of a Hillary Clinton victory,” said Thomas Finlon, director of Energy Analytics Group LLC in Wellington, Florida. “This is also strengthening the dollar, which is weighing on commodities.”
The Bloomberg Dollar Spot Index, a gauge of the greenback against 10 major peers, rose as much as 0.5 percent. A stronger U.S. currency reduces the appeal of dollar-denominated raw materials as an investment.
A magnitude 5 earthquake struck near Cushing, Oklahoma, the nation’s largest crude-storage hub, prompting some pipeline operators to shut operations at the site as a precaution. Oklahoma’s oil and gas regulator reported that all pipelines under its jurisdiction were operating again after shutting down as a precaution because of the temblor, centered less than 2 miles west of Cushing.
Gasoline dropped to the lowest level in seven weeks after Colonial Pipeline Co. restarted the largest U.S. line for the fuel Sunday, six days after an explosion and fire in Alabama during planned work.
December gasoline futures fell 1.5 percent to $1.3579 a gallon after touching $1.3561, the lowest since Sept. 20.
Some of the world’s biggest oil companies, including Saudi Aramco and Royal Dutch Shell, pledged on Friday to invest $1 billion to develop climate-friendly technologies as a global deal to wean the world off oil came into force.
The Oil and Gas Climate Initiative (OGCI), which also includes Total, BP, Eni, Repsol , Statoil, CNPC, Pemex and Reliance Industries, launched the Climate Investments fund which will invest in technologies to reduce carbon emissions but which will also help an increase gas use.
The companies pledged to use a large share of the $1 billion for speeding up carbon capture, use and storage (CCUS) in gas-fired power plants and towards reducing leakages of methane, one of the most polluting greenhouse gases.
“If we can reduce and build the technologies to monitor and reduce fugitive methane emissions that’s like an essential licence for us to be able to advocate natural gas,” BP Chief Executive Bob Dudley told journalists.
The investment is nevertheless dwarfed by the joint annual spending of the member companies, even as they battle one of the longest downturns in the sector’s history. Shell, Total, BP, Statoil, Repsol and Eni are expected to spend nearly $100 billion in 2016.
The 10 firms, which jointly produce around 20 percent of the world’s oil and gas, have already screened a list of 200 CCUS-related technologies and are now assessing which one or ones to develop to commercial scale.
The group will also invest in improving efficiency in transport and energy-intensive industries.
The announcement coincides with the official coming into force of the 2015 Paris Agreement, intended to wean the world economy off coal, oil and gas in the second half of this century in order to slash carbon emissions.
The oil and gas sector, which is directly responsible for 5 percent of manmade greenhouse emissions and the use of its products for another 32 percent, is under growing pressure from investors and the general public to help fight climate change.
“If the CEOs of the 10 largest corporations meet six times during the year it’s not for philanthropy, it’s real business,” said Patrick Pouyanne, chief executive of Total.
Critics have said oil companies need to do more to reduce emissions and to shield themselves from climate change risks.
“Companies could be worth considerably more, not less, if they aligned their portfolios with 2 C by exercising capital discipline and opting for lower-cost upstream projects that make both financial and climate sense,” said Anthony Hobley, chief executive of think tank Carbon Tracker Initiative.
Oil declined for a second day as OPEC’s internal disagreements undermined efforts among major suppliers to reach an agreement in Vienna on trimming output to support prices.
Futures fell as much as 1.1 percent in New York after sliding 2.1 percent at the end of last week. The Organization of Petroleum Exporting Countries ended a meeting on Friday without reaching a deal on country quotas, according to delegates who took part in the discussions. Non-OPEC nations finished talks with the group on Saturday without any supply commitments, Brazil’s Oil and Gas Secretary Marcio Felix said. Brazil attended as an observer.
Oil has fluctuated near $50 a barrel amid uncertainty over whether OPEC can implement the first supply cuts in eight years at its official November meeting. As the gathering opened in Vienna last week, OPEC Secretary-General Mohammed Barkindo warned of the consequences if producers don’t follow through on an agreement to reduce output. The price recovery has already taken far too long and suppliers can’t risk delaying it further, he said.
“Talks over the weekend make it seem less likely there will be an agreement on production cuts,” said Ric Spooner, a chief market analyst at CMC Markets in Sydney. “The market has probably made a fair bit of the adjustment, but I wouldn’t be surprised to see oil fall further into the $47 range.”
West Texas Intermediate for December delivery dropped as much as 53 cents to $48.17 a barrel on the New York Mercantile Exchange, and was at $48.44 at 2:48 p.m. in Singapore. The contract fell $1.02 to $48.70 on Friday. Total volume traded was about 4 percent above the 100-day average. Prices are set for a third monthly gain, up 0.4 percent in October.
OPEC Meeting
Brent for December settlement, which expires Monday, lost as much as 42 cents, or 0.8 percent, to $49.29 a barrel on the London-based ICE Futures Europe exchange after falling 1.5 percent Friday. Front-month prices are up 0.7 percent this month. The global benchmark traded at a premium of $1 to WTI. The more-active January contract slid 27 cents to $50.41 a barrel.
OPEC agreed in Algiers last month to trim output to a range of 32.5 million to 33 million barrels a day and is due to finalize the deal at its Nov. 30 summit in Vienna. The accord helped push prices to a 15-month high above $50 a barrel earlier this month, although they have subsequently fallen amid doubts the group will follow through on the pledge. More than 18 hours of talks over two days in the Austrian capital this weekend yielded little more than a promise that the world’s largest producers would keep on talking.
Some progress was made at the Friday meeting on the methodology to be used for allocating output quotas to OPEC members, said one delegate, who asked not to be identified because the talks were private. Russia reiterated that it’s willing to freeze production, rather than cut, but only if there is an OPEC agreement first, according to participants in Saturday’s meeting.
Oil-market news:
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Iraq published data showing a rare level of detail for its oil production and exports as it seeks to be excluded from OPEC’s planned output cuts because of its war with Islamic militants.
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Libyan crude production increased to 640,000 barrels a day, according to a National Oil Corp. official.
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China’s oil output slump shows no signs of abating as the country’s state-run energy giants hold back spending amid the crash in prices.
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Rigs targeting crude in the U.S. fell by 2 to 441 last week, according to data from Baker Hughes Inc. Friday.
Oil investors must be getting dizzy.
In the two months since OPEC began talking about capping production, speculators’ sentiment has swung wildly, with government and exchange data showing the four biggest weekly position changes ever for the two global benchmark crudes. The latest shift is to optimism, with money managers the most bullish on West Texas Intermediate oil in two years.
“Since the summer we’ve had big moves in net length,” said Mike Wittner, head of oil-market research at Societe Generale SA in New York. “It usually has trended up or down over a couple of months. Now this is happening in a matter of weeks. We’re seeing huge shifts.”
Money managers reduced bets on lower WTI prices by more than half in the past three weeks as OPEC agreed to its first deal to cut output in eight years. That drove net length to the highest since July 2014 in the week ended Oct. 11, Commodity Futures Trading Commission data show. Brent longs also rose, leaving the combined length of the two benchmark contracts at the highest in at least five years.
The Organization of Petroleum Exporting Countries agreed on Sept. 28 in Algiers to trim output to a range of 32.5 million to 33 million barrels a day, which is due to be finalized at the Vienna summit next month. OPEC took a step toward coordinated supply curbs with Russia last week and will meet for a “technical exchange” to set a road map for output levels later this month.
The swings in sentiment have tracked the rocky road to $50 a barrel oil. Speculators’ combined WTI and Brent crude net position rose or fell more than 100,000 contracts four times in the past two months, the only moves of that size in CFTC and ICE Futures Europe data going back to 2011.
Prices began to rise after OPEC’s president said Aug. 8 that the group would hold informal talks in Algiers and Saudi Arabia signaled Aug. 11 it was prepared to discuss taking action to stabilize markets. Futures gave up most of those gains amid doubts that Saudi Arabia and Iran to reach an deal, before the agreement in Algiers sparked the latest rally.
“The change in tone from the Saudis is important,” said Kurt Billick, the founder and chief investment officer of Bocage Capital LLC in San Francisco, which manages about $432 million in commodities equities and futures. “Getting to a yes in Vienna is challenging. That they are willing to talk about a deal is a big change.”
Money managers’ short position in West Texas Intermediate crude, or bets on falling prices, shrank by 28 percent to 71,407 futures and options. Longs rose 1.8 percent to the highest since June 2014. The resulting net-long position increased 13 percent.
WTI increased 4.3 percent to $50.79 a barrel in the report week. Prices on Monday were down 0.6 percent at $50.04 a barrel as of 9:13 a.m.
Other Markets
In the Brent market, money managers boosted net longs by 11 percent to 396,694 during the week, according to data from ICE Futures Europe. It was the most bullish total since April.
In fuel markets, net-bullish bets on gasoline rose 19 percent to 36,650 contracts, the highest since March 2015, as futures slipped 1.1 percent in the report week. Wagers on higher ultra low sulfur diesel prices climbed 46 percent to 9,074. Futures rose 2.1 percent.
The scale of the internal differences OPEC must resolve before securing a deal to cut supply was revealed Oct. 12 as the group’s latest output estimates showed a half-million-barrel difference of opinion over how much two key members are pumping.
“The bottom line is that they’ve made an agreement,” Wittner said. “If you are going short you are betting against the Saudis, which isn’t a good thing historically.”
Oil and gas industry conditions stand to gain strength after 2017, in a confluence of growing demand and a collapse in no-shale capacity, according to an end-of-quarter report from Morningstar in Chicago.
“We are increasingly bullish on oil prices rallying in the medium term, and have raised our WTI forecast to $65/bbl for 2018, which is the level we believe is required to drive a large-scale recovery in U.S. shale activity,” wrote analyst Joe Gemino. “Even so, the strength of U.S. shale is lurking beneath the surface: Our analysis shows that the recent uptick in rigs and falling shale decline rates together are enough to stabilize U.S. crude production within six months.”
Gemino also said that if U.S. activity doesn’t scale back, production will begin to grow again in 2017. That highlights the strength of tight oil in the country, he said, which would limit a commodity price rebound.
“Should a price rally ensue, it is far too strong to not overheat and eventually snuff out any future oil price rally. We remain bearish on oil prices for the longer term, and we reiterate our mid-cycle oil price outlook of $55 WTI ($60 Brent),” he said.
But keeping the above in mind, Gemino said, there is more evidence that shale producers can survive – perhaps even thrive – at lower prices than assumed in earlier forecasts.
Through labor cost-cutting and efficiency advances in technology, shale producers have managed to reduce production costs, which makes drilling profitable even at lower commodity prices. In February, some producers made headlines suggesting that “$40 is the new $70” per-barrel price needed to drill, but that has yet to fully manifest.
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