Wednesday, January 24, 2018
Tuesday’s oil trading was bullish, with price action appearing to be influenced by four factors. The U.S. dollar weakened against other currencies, which typically supports higher commodity prices. Traders continued to be reassured by the Saudi energy minister’s recent comments regarding OPEC and non-OPEC producers continuing their cooperation into 2019. In addition, this week the IMF “revised upward its forecast for world economic growth in 2018 and 2019, to 3.9 percent for both [years,] a 0.2 percent increase” from its October projection.” This of course is positive for oil demand growth. Lastly, traders anticipate that this morning’s EIA inventory report will cite a tenth-straight weekly decline in U.S. crude oil stockpiles, which would mark the longest run of declines in weekly data since 1982.
John Kemp of Reuters points out that “hedge funds added to their record bullish positions in petroleum in the week to January 16th, continuing the recent wave of buying. Across the petroleum complex as a whole, speculator positions look increasingly stretched, with fund managers holding almost 10.5 long positions for every short one.” Should OPEC and their partners be pleased with such hedge fund positioning? In two important ways they should be grateful. “The surge in speculative flows has fueled a robust rally [that has taken U.S. crude oil from about $45 a barrel in July to almost $65 today. Money manager positioning has added considerable momentum to the upswing. Secondly, the recent rally has also flipped the shape of the futures curve (from contango to backwardation,) making near-dated barrels more expensive than those dated further out. OPEC’s members sell the majority of their exports in the spot market. So higher near-dated prices mean more cash both in absolute terms and relative to rival U.S. oil producers that hedge their risk by selling futures.”
Hedging is, of course, what OPEC and their partners are not grateful for. “As speculators buy, U.S. crude producers are selling, thereby locking-in prices on future output and spurring higher production. OPEC’s dilemma is that surging prices brings in more revenue, but also brings more futures money into the market, spurring more activity by rival shale producers.” So how is OPEC currently dealing with this dilemma? Are they promoting rising prices or are they attempting to apply the brakes? If it’s the latter, they would be looking for ways to talk the price down and that’s not the case. Instead, they’re still actively engaged in jawboning prices higher. As recently as this past weekend, “OPEC and non-OPEC ministers sought to validate the bullish narrative by insisting they remain committed to tightening the oil market through 2018 and plan to continue their cooperation in 2019.”
Sooner-rather-than-later, OPEC and their partners may lose control of bullish sentiment. That’s because experience suggests that lopsided speculator] positions, either long or short, are normally followed by a sharp reversal in prices when some portfolio managers attempt to realize their profits. What will trigger a dramatic sell-off? Oilprice.com suggests that “the most likely reason … would be rising U.S. production.”
Last Wednesday’s EIA report showed a surge in U.S. crude output. Will today’s EIA inventory report show a WTI stock drawdown for the 10th straight week? Yesterday, API cited builds for both crude (+4.8 million barrels) and gasoline (+4.1 million barrels). Fundamentals always remain bullish until they don’t.