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Crude oil update - PM Bulletin
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 Tuesday 21 March 2017

Crude oil update - PM Bulletin

 

 

We had a look at crude oil in some detail this time last week, so it’s time for an update. First up, here’s the daily chart of the front month WTI contract courtesy of TradingView.com:

https://www.spreadco.com/assets/21.031.png

And here’s the “break” in close-up:

https://www.spreadco.com/assets/21.032.png

The first thing to notice is that crude has failed to bounce back following the market plunge on 8th March. As a reminder, back then both WTI and Brent slumped sharply following the release of US inventory data from the Energy Information Administration (EIA). This showed an unexpectedly large build in crude stockpiles for the week ending 3rd March. Inventories rose by more than 8 million barrels, the largest increase in history, and well above the 1.1 million barrel increase anticipated. This news, together with repeated failures to break above resistance and excessive long-side speculative positioning, led to market panic as traders rushed to cover their exposure. Crude oil slumped over 5% on the day and fell further that week to close out at its lowest level since November 30th. That was when OPEC and a number of non-OPEC producers agreed to cut output by just under 1.8 million barrels per day.

Last week’s inventory data showed a modest decline and this has helped put a floor under prices for now. We’ll have an update from the American Petroleum Institute after tonight’s close, and the US Department of Energy’s EIA (Energy Information Administration) release the official weekly update tomorrow afternoon.

Yesterday crude suffered another sharp sell-off on the open. However, prices subsequently steadied, albeit at lower levels. Prices are currently finding some support on renewed speculation that OPEC and non-OPEC producers could extend their November production cut agreement beyond the current June expiry date. It appears that Saudi Arabia is the driving force behind a move to extend not only the duration but possibly also the size of future production cuts. However, this would obviously require a fresh deal between all the OPEC and non-OPEC producers who reached agreement back in November. The trouble is that there’s no guarantee that Russia is happy to do so as the country is worried about the US simply increasing production as prices rise and so grabbing market share. One of the effects of higher oil prices is that they encourage US producers to come back on line. On Friday oil services firm Baker Hughes reported that US drillers added 14 oil rigs last week. This bringing the total count up to 631 rigs - the most since September 2015.

So one of the key questions now is where US shale oil producers can turn a profit. What is in no doubt is that new technologies have driven costs down dramatically over the past five years. By some calculations it appears that production costs could now be as low as $30/35 per barrel for some US shale drillers. This in turn means that break-evens can be as low as mid-$40 per barrel.

But it’s also worth noting that positioning in the oil futures market has changed dramatically over the past week. According to the US Commodity Futures Trading Commission (CFTC), oil traders reduced their net long WTI crude futures and options positions in the week to March 14 by the largest amount on record. This was also the third consecutive week of reductions. This should mean that the market is getting back into balance and there’s now less chance of negative news leading to a dramatic sell-off.

Investors will continue to react to weekly updates on the US rig count and inventory numbers. Then they have to wait until month-end to check on OPEC/non-OPEC compliance over the production cut agreement. There are already concerns that Saudi Arabia is doing all the heavy lifting when it comes to reducing output with other countries not sticking to the agreed quotas.

For crude to keep heading higher OPEC and non-OPEC producers will have to improve compliance when it comes to output cuts. Not only that, but they’ll need to agree to extend the duration of their production cut agreement beyond June. However, there’s little doubt that US shale oil drillers will jump on any reduction in OPEC and non-OPEC supply to jump in and grab more market share. This could mean that crude is set to range-trade once again, albeit at lower levels. 

Disclaimer:

Spread Co is an execution only service provider. The material on this page is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by Spread Co Ltd or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

 

Posted by David Morrison

Tagged: Bulletin PM

Category: PM Bulletin


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