• 2 minutes Oil Price Could Fall To $30 If Global Deal Not Extended
  • 5 minutes Iran downs US drone. No military response . . Just Destroy their economy. Can Senator Kerry be tried for aiding enemy ?
  • 8 minutes The Inconvenient Truth Of Electric Cars
  • 5 hours Here we go folks, the wish of so many: Pres. Trump threatens to lessen US security role in Strait of Hormuz, unveils sanctions
  • 1 hour Magic of Shale: EXPORTS!! Crude Exporters Navigate Gulf Coast Terminal Constraints
  • 5 hours To be(lieve) or Not To be(lieve): U.S. Treasury Secretary Says U.S.-China Trade Deal Is 90% Done
  • 13 mins SHALE MAGIC: Let the oil flow: US to lead oil output growth through 2030: ConocoPhillips chief economist
  • 17 mins The Plastics Problem
  • 5 hours Looks like Trump is putting together a "Real" Coalition to protect Persian shipping lanes. Makes perfect sense. NO Fake "Coalition's of the Willing" UPDATE REUTERS Pompeo "Sentinel Program"
  • 18 hours Here We Go: New York Lawmakers Pass Aggressive Law To Fight Climate Change
  • 18 hours The Strait of Hormuz is the world’s most important oil transit chokepoint
  • 13 hours Hard To Believe: UAE Will Work To Defuse Middle East Tension
  • 39 mins On the hobby side of things
  • 8 hours Cap and trade: What could Oregon’s carbon policy cost you?
  • 20 hours Climate change & Wildfires: More Wildfires To The Western U.S., Will Affect Tens Of Millions Of People
  • 11 hours Oil Demand Needs to Halve: Equinor

The Two Conflicting Influences that Will Keep WTI Rangebound

Looking back at the last couple of weeks’ price action in WTI one thing stands out. OPEC or no OPEC, the benchmark U.S. oil futures contract attracts plenty of sellers above $51. I remain skeptical of the chances of any meaningful action from the oil cartel as a result of their “agreement to agree” on action on production to support the price of oil, and it seems that others are coming into that camp, but if some reports I have heard from traders are to be believed that is not what put such a firm top on WTI above that level. Those reports indicate that the selling came from producers hedging at prices over $51, and if that is the case the path to further gains looks like a seriously uphill battle.

(Click to enlarge)

If we look back even further to when WTI was declining rapidly last year, though, that should not come as any major surprise. Many, including, I will freely admit, me, said at that time that the price declines would quickly lead to a reduction in the rig count and reduced supply, which would in turn cause a fairly rapid rally. However, that didn’t happen until oil was trading substantially below $50, which gave an indication that at around that level even relatively expensive projects were still profitable. Given that history the fact that the low $50s are providing such determined resistance points is only logical. It is just the market working exactly how it should do in theory…higher prices encourage production, which in turn drags the price back down again.

If those stories are true, though, and the selling for hedging purposes is enough to stop what was a strong news driven rally, then that clearly has implications for the future. The $60 or $70 per barrel WTI that some saw as the logical result of a revitalized OPEC is clearly not on the cards any time soon. Even if the Saudis and Iranians do reach an agreement, and even if the Russians tag along, there are still some serious barriers to further significant gains.

What the hedging reinforces is that there is still a huge untapped reserve of oil in the U.S. and that much of that production is viable at around $50, which in turn means that any action by OPEC will have a limited effect. Such action would make another complete collapse in price highly unlikely, but it would probably not cause a spike much above what we have already seen in anticipation.

The futures curve as it stands also supports that view. Futures are still in contango (meaning that longer dated contracts are higher), but the curve is not abnormally steep. If we look at the January 2017 contract that expires well after OPEC’s scheduled meeting at the end of November, it is trading as I write at $51.32, and we have to go all the way out to December of 2018 to see prices above $55. That does not suggest any confidence in OPEC’s ability to push oil, or at least WTI, much higher.

It seems the that we are entering into a period when two conflicting influences, the possibility of an OPEC agreement to at least freeze production and U.S. producers’ readiness to increase production at prices above $50, are effectively cancelling each other out. That suggests that if the cartel does reach an agreement that members actually stick to we could be in a range of around $40-$55, or quite probably even narrower, say $43-$53 for quite some time to come.




Oilprice - The No. 1 Source for Oil & Energy News