Oil is carrying on where it left off last week, rallying higher on the low likelihood event of a production freeze by key global producers. As rumors and murmurs lifted prices last week by the most since April, there appears little incentive for producers to back away from jawboning. Hark, here are five things to consider in oil markets today:
1) As rhetoric swirls of an OPEC oil production freeze, it seems prudent to point out the contrast betwixt actions versus words. As our ClipperData illustrates in the chart below, crude oil loadings from OPEC members in the Middle East (USE, Saudi Arabia, Qatar, Kuwait, Iran and Iraq) have risen by over 20 percent since the beginning of last year. OPEC oil exports from these six cartel members is now well above 18.5 million barrels per day, 3.3 million bpd higher than early last year.
(Click to enlarge)
2) In response to the return of production freeze chatter from OPEC members, hedge funds have bolstered their long positions in the latest CFTC / ICE data (through to last Tuesday). After dropping into thirty dollardom, jawboning has laid down a bullish wildcard, and bullish bets have risen the most since January in the latest data. Short positions have barely budged, meaning the net long position has risen strongly.
(Click to enlarge)
3) After we highlighted last week that Qua Iboe is likely to be gone 'til November, this has been swiftly followed by Shell declaring another force majeure on Bonny Light exports. The force majeure is due to a pipeline leak, although it is not clear whether it is a result of sabotage.
Force majeure was only lifted on Bonny Light last month after a leak on a different pipeline; according to our ClipperData, Bonny light loadings so far this month are at their lowest since 2013. Related: Morgan Stanley: ‘’The Oil Rally Might End On Wednesday’’
4) Just as winter natural gas prices need to take heed of the woolly worm, hedging activity by Mexico needs to be acknowledged and respected, given their prudent past. Although it has missed the target some years, in others it has made a considerable amount by hedging over 200 million barrels of its domestic production.
Last year it received $6 billion by hedging its exposure, locking in prices at $76/bbl, while this year it has hedged at $49/bbl - considerably higher than the average price so far this year. Hence, as it is apparently starting its hedging program for next year (at a similar price level to last year), it could be a harbinger for future price action.
5) Finally, the chart below from EIA shows its production forecast over the coming years. While long-term forecasts have to be considered with a pinch of salt (or ten), they are still useful for highlighting potential future broader trends.
Shale gas is projected to contribute the biggest increase to global natural gas production over the coming decades. The U.S., Canada, China, and Argentina are expected to continue to lead the charge in shale production, while they will be joined by Mexico and Algeria; these six countries are projected to account for 70 percent of global shale production by 2040.
By Matt Smith
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There is a glut of oil in the world, and even if some producers decide to freeze production there is plenty of supply out there to replace it for the foreseeable future. As supply tightens in one place more will come online in another place, and the entire industry knows it.
Of course, managing to manipulate the market to keep the price $5 to $10 higher than supply and demand would call for means billions of dollars for the big producers and entire industry. So I suppose it will continue, but anybody with 2 neurons knows what is going on.