No need to bury the lede in this week’s column: OPEC will extend production guidelines in next week’s meeting in Vienna, and extend them even more than originally planned.
The oil market wondered whether the OPEC production cuts would even hold when they were first installed, now the market is about to get the added benefit of an 8-month extension instead of the planned on six months.
But what has been the response from the oil markets? They’ve been tepid at best.
This reaction has been attributable to one physical and one financial factor. On the physical side, oil production from U.S. shale players has been increasing strongly despite weakened prices and slow build outs of infrastructure. Unexpectedly, we’ve also seen very strong growth in production from offshore oil, which was thought to still be subject to a longer down-cycle slump than onshore production.
This combination of Gulf and shale production increases has seen U.S. oil production increase above 9.2m barrels a day, almost a U.S. record.
From the financial side, the last three upticks in oil prices has brought with it an avalanche of speculative buying from hedge funds and in all three cases has resulted in a ‘mini-crash’. Overwhelming speculative longs in recent markets has portended a drop in prices – and a subsequent ‘clearing’ of long positions, and losses, among those hedge funds. Related: Oil Prices Rise As Most OPEC Members Back Deal Extension
So, as we head into the meeting next week, where are we?
The inevitable rebalancing of global supply and demand has been slowed by the resilience of U.S. onshore and offshore success, but continues apace. Indeed, the IEA is already noting that supply and demand for oil may already be in balance. Infrastructure, particularly in the red-hot Permian basin could be the factor slowing the breakneck production there, and Russia has committed to a slowdown as well – boding well for a continued slack supply for the rest of the year.
From the financial side, the oil hedge funds seem to be using a formula of ‘fool me once, fool me twice, but never fool me three times’: Despite oil’s rise in the last several sessions, speculative longs have not flooded back into the futures markets as on the last three occasions – and that’s a good thing, if you’re hoping to see oil finally break out of its long $44-$53 range. Related: U.S. Shale Just Won’t Die: Bankrupt Drillers Rise Again
I’ve been accused of crying wolf on several occasions, that this will be oil’s last trip into the $40s – but this will be oil’s last trip into the $40’s.
Therefore, I do advise an aggressive accumulation of oil stocks going into the meeting next week. Last week, I gave some ideas and a certain sliding scale of my preferred U.S. E+P’s – with Apache (APA) coming out on top for me. That one has performed well since my recommendation and continues to be a top choice. On the list of majors, I will also stick with a long favorite: Total (Tot).
By Dan Dicker for Oilprice.com
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