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Matt Smith

Matt Smith

Taking a voyage across the world of energy with ClipperData’s Director of Commodity Research. Follow on Twitter @ClipperData, @mattvsmith01

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Oil Prices Gain On Higher Investor Confidence In Tightening Markets

Despite a quiet start to the week on the economic data front – while Japan is closed for three days due to national holidays – there is a generous amount of positivity swirling around in the US. The crude complex is ripping higher after Friday’s lambasting, encouraged higher by signs of a tightening market and further closing of short positions in the latest CFTC data. As the below chart illustrates, hedge funds have cut their gross short position by almost a third in recent weeks to 111 million barrels. This is down from a peak of 163 million in mid-August, but still almost double the 56 million barrels seen in mid-June:

(Click to enlarge)

Meanwhile, after last week’s Fed decision to keep interest rates unchanged, focus now shifts towards the next meeting. (Oh good). Expectations of a rate hike are now being unwound for October, with the likelihood down to only 20%. In theory, ongoing loose monetary policy should be supportive for the crude complex into the year-end, as the US dollar sees lesser upside pressure and investors are encouraged into riskier assets such as equities and commodities. Related: Iran Deal May Redefine The Middle East

(Click to enlarge)

The below chart is from a presentation over the weekend by James Bullard from the Federal Reserve Bank of St. Louis, in which he outlines his case for why we should have seen a rate hike at last week’s FOMC meeting. He highlights that policy will remain ‘exceptionally accommodative through the medium term, no matter how the Committee proceeds‘, pointing to upward pressure in inflation and downward pressure on unemployment. As this chart illustrates, current inflationary pressures are absent, and remain well adrift of the Fed target of 2%: Related: Which Shale Firms Will Cut Production?

(Click to enlarge)

A couple of tidbits are helping to dictate movement in the crude market today. One is a report out from Wood MacKenzie, which concludes that the oil industry is set to implement cost-cutting on upstream projects of 20-30% amid the lower oil price environment. It says investment is down $220 billion for this year and next, with a total of 46 projects deferred. The real headline grabber, though, is its estimate that $1.5 trillion of investment destined for new US oil projects is out of the money at an oil price of $50. Eek. Related: Peak Oil Has More To Do With Oil Prices Than You May Think

Finally, data out from the Riyadh-based Joint Organisations Data Initiative (JODI) indicate that Saudi Arabia’s crude stockpiles rose to a record in July of 320 million barrels, the highest since at least 2002. JODI reported that Saudi oil exports also declined for the third time in four months in July, amid higher summer domestic demand for power generation. According to our #ClipperData, we see August exports dropping slightly on July to 6.5 million barrels per day:

By Matt Smith

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