After declining by more than 20 percent from the October peak, oil prices are showing some signs that they have now bottomed out.
WTI hit a low point at $56 per barrel on Wednesday and Brent hit a low just below $65 per barrel. Both crude benchmarks regained some ground at the end of the week, despite the huge increase in U.S. crude oil inventories. In fact, rising prices in the face of the 10-million-barrel increase in crude stocks suggests that oil may have already hit a bottom. “[Y]esterday’s price reaction to the US inventory data shows that negative news is now largely priced in,” Commerzbank said in a note. “This is the only way to explain why an increase in US crude oil stocks of a good 10 million barrels failed to put further pressure on prices.”
At the same time, crude stocks have now climbed for eight consecutive weeks, surely a sign that the market is decidedly back in a surplus situation. That is bearish, to be sure, and helps explain the collapse in oil prices over the past month.
But it also significantly increases the odds of a response from the OPEC+ coalition in early December. “[W]e believe oil is oversold and will likely bounce up from the current levels, as OPEC+ dials back production in December,” Bank of America Merrill Lynch said in a note on Wednesday. The bank said that it no longer sees Brent rising to $95 per barrel next year, as it previously thought, noting that “oil bulls have capitulated and so have we.” Related: It’s Time For Big Oil To Start Spending
However, the liquidation of net-long positioning by hedge funds and other money managers has taken a lot of pressure out of the market. As a result, there is more room on the upside once again. “[T]he oil market is a lot cleaner now from a positioning standpoint. Given that inventories are still not too high, we believe oil prices should find some support from a fundamental perspective,” BofAML wrote.
Barclays pointed to some fundamentals to suggest that things aren’t as bad as they seem. For instance, OECD stocks in terms of “days of demand cover,” remain below the five-year average. “Based on our balances, we expect the amount of inventories in the OECD on a days of demand cover basis to remain supportive of prices through the end of next year,” Barclays said in a note.
Moreover, the waivers on Iran sanctions are temporary, and even though the U.S. was more lenient than expected, Iran should continue to lose exports in the months ahead. Indeed, the recent price crash actually gives the Trump administration a lot more room to work with, and it can take a harder line with the eight countries it granted waivers to the next time around.
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Finally, lower prices could shut in marginal supply and stimulate demand. Barclays even suggests that Iran may step up threats on the Strait of Hormuz because of lower prices, while Venezuela might lose output at a faster rate.
Still, a price increase from current levels hinges on action from OPEC+. Saudi Arabia has already signaled that it intends to lower exports by 500,000 bpd in December, and that further action might be forthcoming from OPEC+. Russian officials told Reuters that they are not enthusiastic about the 1.4-million-barrel-per-day cut that was reported in the media, but that they might sign on to something more on the order of 1 mb/d.
These rumors tend to drive the market and the price gains seen on Thursday and Friday may have been somewhat driven by rising expectations of OPEC+ action. As these things go, oil traders buy and sell on the rumor. More specifically, the 500,000-bpd Saudi cut is already being priced into the market, and the potential 1-mb/d cut from OPEC+ collectively is now increasingly being factored into the market as well. Because there are now rumors of a cut as large as 1.4 mb/d, the 1 mb/d option could take on a “middle-of-the-road” option. Anything less will be a huge disappointment and could drag oil prices back down.
The IEA noted that the global supply surplus could rise to as much as 2 mb/d in the first half of 2019 based on the trajectory of the current fundamentals. It will require OPEC+ action to head that off.
By Nick Cunningham of Oilprice.com
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There is no other commodity or futures product that would consistently be up after a government inventory report of a build--this past week--well over 10 million barrels (about quadruple what analysts expected). API reported a larger-than-expected build, and yet the weekly rig count data from Baker Hughes reported an increase. The U.S. is now the largest oil producer in the world, with a record 11.7 million barrels per day.
Yet, with all of this bearish data, as well as the U.S. granting waivers on oil sanctions from Iran allowing 8 countries to continue buying, prices have only moved upwards since Wednesday, opening above the close and staying positive for the session. WTI just opened up on Globex about an hour ago and already surpassed the 1% up territory (crude is up almost $1/bbl).
I know, I know...it's because Saudi Arabia said they are CONSIDERING cutting production, and OPEC has yet to decide come December (thus, no barrels of oil taken off the market yet). Russia is against cutting production, as they want more market share. Please don't forget--when WTI hit $76.90/bbl (recent high) this was amidst much publicized news of Saudi Arabia and Russia prepared to ramp up production to record levels and guess what? No one cared!
So, why should the market care now about the Saudis CONSIDERING cutting production? Wouldn't that be a double-standard for prices to rise on that news yet also rise when the Saudis said they are ramping up production? I mean, why do we even have a "market" when they are allowed to jawbone prices to their liking anytime they want? Again, no other commodity or futures product is this rigged.
The real reasons for the recent slump in oil prices have hardly anything to do with rising US crude oil inventories which the global oil market normally takes at the best of time with huge pinch of salt and virtually everything to do with market realization that US sanctions have so far failed to cost Iranian oil exports a loss of even one barrel. That is despite the fact that the global oil market has been bombarded for months prior to the sanctions by projections that US sanctions will cost Iran’s oil exports some 500,000 b/d to 1.5 million barrels a day (mbd).
Furthermore, the issuing of sanction waivers to eight countries who didn’t need them in the first place and who would have continued to buy Iranian crude with or without waivers is the clearest admission by the Trump administration that their zero option is out of reach and that sanctions are doomed to fail.
Another reason for the slump is that the global oil market has not re-balanced completely and that there is still a small pocket of glut capable of taking care of outages in Venezuela and elsewhere. That is why Saudi Arabia’s and Russia’s decision to add 650,000 b/d six weeks ago to keep prices down was a major mistake. It has just added to the glut.
OPEC members will not agree new cuts in production in their meeting in December. Instead, they will ask Saudi Arabia and Russia to withdraw instead the 650,000 barrels a day (b/d) they added to the market six weeks ago in spite of objection by the overwhelming majority of OPEC members.
I am sure that you are aware that oil prices are volatile by nature given the various economic and geopolitical pressures they come under virtually on daily basis. That is why one shouldn’t be surprised to see oil prices shuttling between bull and bear markets all the time.
In October the oil price hit $87 a barrel. Today it is $67. Tomorrow the markets could change from bearish to bullish sending prices up to $80 particularly since the robust fundamentals of the global oil market haven’t changed since October when the oil price hit $87.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London