Was the meeting between the OPEC and non-OPEC oil ministers in St Petersburg, Russia on 24 July a game changer or not? There were high hopes for additional production cuts, which were partially realized, but just what does the playbook look like?
1) Saudi Arabia announced its intention to make further cuts to bolster flagging oil prices. Saudi minister Khaled al-Falih said that Saudi oil exports would be limited to 6.6 million barrels per day, a decline of about a million barrels or almost 14 percent compared to last year. Sounds impressive, but note that’s exports, not production.
2) Nigeria agreed voluntarily to limit its production to 1.8 million bpd (but only once or if it reaches that level). But Libya with a target of 1.25 million bpd remains exempt.
3) Non-compliance remains an issue for OPEC and non-OPEC participants alike. For instance, Iraq’s OPEC compliance has fallen to 29 percent, which clearly presents a threat to the agreement.
But is it enough? The market seems to think so as WTI has soared $2.95 since the meeting. Nonetheless, the biggest winner from St. Petersburg will undoubtedly be the U.S. shale producers. Rystad Energy is predicting that before the end of this year, monthly U.S. oil production will top the record 10 million barrels per day that was set in November 1970. Too bad for OPEC, since the cartel hardly has any control over U.S. shale production. On the other hand, the biggest loser is bound to be the Saudi treasury as the Saudi central bank’s holdings of all types of foreign securities combined shrank by about $40 billion in the 12 months through March of this year. This raises the question of whether the Saudis are still in the driving seat when it comes to oil prices. A question that can surely only be answered with a resounding “no”.
The U.S. CFTC Commitments of Traders data released on Friday 21 July clearly confirmed who is driving the bus: global traders are short U.S. dollars, period. They have increased their long euro positions (at a 6-year high), reduced short sterling positions and also increased long Australian and Canadian dollar positions (as the CAD nudged towards 80 cents for the first time in several years.) The message is very clear: the world’s central banks, not Riyadh, are calling the shots. At the same time, bullish bets in the WTI futures market increased almost 11 percent by over 38,000 contracts on the week to total 396.5 thousand contracts, a high not seen since last spring. Related: Europe’s Biggest Oil Refinery Shut Down After Fire
As we all know, a weaker U.S. dollar means higher commodity prices even though the logic of this can be disputed. But if that’s how the algorithms read it, then this shibboleth must be right. Consider the Dixie or U.S. dollar index (DXY), which is now down over 8 percent from the beginning of the year during a period when the Fed hiked rates not once, but twice. As for the dollar, short positions will also certainly continue to increase mainly due to political gridlock in the U.S. as the Trump trade is finally put to bed. In addition, further rate hikes from the Fed are becoming less likely owing to softer-than-anticipated economic fundamentals, including GDP growth and mute inflation.
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Fundamentally, the world is still well supplied with crude, which remains at historically high inventory levels despite the recent string of impressive drawdowns in the U.S. But after all, this is the time of year before semi-annual maintenance season that big drawdowns can be expected. Technically, we are still in a downward sloping channel and looking pretty overbought; mean reversion is more probable than significantly more upside.
Doha, Vienna, St. Petersburg: the cycle of expectation and disappointment repeats itself. If you’re looking for a rationale for the crude price, it’s dollar weakness, not commodity strength.
By Brian Noble for Oilprice.com
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