To celebrate the birth of AA Milne (some 134 years ago), today is national Winnie the Pooh day. Once again, though, the crude complex has gone off script…acting like Eeyore instead. Hence crude prices are once again looking downbeat and depressed, wallowing in twenty-dollardom.
In all fairness, it has good reason to be looking down. With the lifting of Western sanctions on Iran over the weekend, the market is bracing itself for a new wave of supply to hit the market – as Iran announces it is immediately targeting a production increase of 500,000 bpd.
We have had various producers going on the newswires over the weekend to express their concerns – or to try to calm the market. Oman’s oil minister has said it is willing to cut production by 5-10 percent to prop up prices; Oman produces ~1 million barrels per day, and is the largest producer in the Middle East who is not an OPEC member (it currently exports over 800,000 bpd, with ~70 percent of this going to China, according to our ClipperData). To counter Oman’s concerns, we have had Saudi oil minister Ali al-Naimi going on record over the weekend to say that he is optimistic for the future, and that he expects oil prices to improve.
Today we have had the release of OPEC’s monthly oil report; on the demand side, we saw minor upward tweaks to both last year and this year’s demand. Demand is estimated to have increased by 1.54 million bpd in 2015, while this year demand growth is expected to be +1.26 million bpd. Related: The World Just Lost One Of Its Biggest Oil Plays To Low Prices
On the supply side, OPEC production averaged 32.18 million bpd in December (BIG n.b. = this number now includes Indonesia), a drop of 211,000 bpd from the prior month. This drop was led by losses from Nigeria (77,000 bpd), Saudi Arabia (57,700 bpd), and Iraq (31,100 bpd). OPEC now projects that non-OPEC supply is going to drop by 660,000 bpd in 2016, led by stronger declines in the U.S. and Canada:
The latest CFTC data show hedge funds continue to lean bearish. Speculative short positions in WTI have risen to 200,975 contracts – a new record. Long positions also increased, however, climbing by 7.4 percent, as market participants try to catch a falling knife. As we saw in March and August of last year, reaching such extremities in short positions preempts a short-covering rally – something to be wary of: Related: When Will Petrobras’ Fire Sale Start?
Last week we looked at how Canada’s Alberta Bitumen oil price had dropped below $10/barrel. Well, this has nothing on North Dakota Sour – one producer is paying $0.50/barrel for it to be taken off their hands. The lower quality crude generally trades much lower than other U.S. benchmarks; the high-sulfur grade was at $47.60 in January 2014, and $13.50 a barrel a year ago. But due to the lack of pipeline capacity, prices have now been pushed into negative territory. Related: Did Shell Take On Too Much Risk In This Oil Price Environment?
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U.S. equity and bond markets are closed in observation of Martin Luther King Jr. Day; crude is open for electronic trading until 1pm EST. Things have been pretty sparse on the economic data front, with Japanese industrial production for November the main highlight (it was -0.9 percent MoM, slightly better than consensus of -1.0 percent). It’s a doozie of a data dump from China tonight though, as we get industrial production, Q4 GDP, and tales of retail sales….it’s going to be a wild ride.
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By Matt Smith
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