Mission & Name
US Foreign Policy (Dr. El-Najjar's Articles)
Oil Prices Running Out of Reasons to Rally
By Nick Cunningham
CCUN, January 20, 2017
Oil prices faltered at the start of the second week of the year, as fears
set in about a rapid rebound in U.S. shale production. For the better part
of two months, optimism surrounding the OPEC deal has buoyed oil prices, but
bullish sentiment from speculators are showing early signs of abating,
raising the possibility that the oil rally is running out of steam.
WTI and Brent sank more than 2.5 percent in intraday trading on Monday,
report at the end of last week showed another solid build in the U.S.
rig count, the tenth consecutive week that the oil industry added rigs back
into the field. Aside from a single week in October, the U.S. oil industry
has deployed more rigs in every week dating back to June, a remarkable run
that has resulted in more than 200 fresh rigs drilling for oil. The gains in
the rig count come even as oil prices have held steady in the mid- to
low-$50s per barrel.
At the start of 2017, there are two major
dynamics at play occurring at the same time, each pushing in opposite
directions on the market. The OPEC deal is slated to take oil off the
market, while U.S. drilling is expected to add new supply. The pace and
magnitude of each trend will ultimately drive oil prices one way or the
On the positive side of the ledger, there are early signs
that OPEC members are meeting their commitments. Saudi Arabia
last week that it is lowering its production in January by 486,000 barrels
per day, a volume that it promised to cut as part of the November deal. That
will take output down to 10.058 million barrels per day, a level that Riyadh
was only required to meet as an average over the January to June time
period. Cutting to that level ahead of time is a sign of good faith from
Saudi Arabia, and increases the chances that OPEC will stay true to its
On top of that, Kuwait’s envoy to OPEC said that Qatar,
Kuwait and Oman were also complying with the cuts. In an
interview with Bloomberg, Kuwait’s Nawal Al-Fezaia said that those
countries already told customers that cuts were imminent. "It’s a good time
to do maintenance on oil fields during production cuts," Al-Fezaia said,
noting that Kuwait will lower output from 2.89 mb/d in December to 2.7 mb/d
by the end of January.
Market analysts paused a bit on news that
Iraq’s oil exports from its southern ports on the Persian Gulf hit a record
high in December, but the data has no bearing on whether or not Iraq will
comply with the agreed upon cuts. "Achieving this record average will not
affect Iraq’s decision to cut output from the beginning of 2017," Oil
Minister Jabbar Al-Luaibi told Bloomberg in an emailed
statement. "Iraq is committed to achieving producers’ joint goals to
control the oil glut in world markets."
It is still early but all
signs point to a stronger commitment from OPEC to adhere to the specifics of
the cuts than market analysts might have given them credit for. That bodes
well for a narrowing supply surplus – and ultimately a deficit – as well as
falling inventories. In other words, OPEC is succeeding in putting upward
pressure on prices.
However, the flip side of the equation is faster
drilling from the U.S., where rig counts continue to climb. Oil output,
according to EIA weekly surveys, is up roughly 300,000 bpd from summer lows,
with more supply expected to come online in the months ahead as drilling
picks up pace.
It is unclear, at this point, how rising U.S. supply
and falling OPEC output will ultimately balance out. For now, the consensus
seems to be tightening conditions in the first half of 2017, with much
greater uncertainty in the second half, but that remains to be seen.
What is clear is that oil speculators have built up such a large bullish
bet on oil that they have opened up crude to near-term downside risk.
Reuters, hedge funds and other money managers amassed net-long positions
in WTI and Brent equivalent to 796 million barrels in the last week of
December, which was nearly double the amount from mid-November. The OPEC
deal clearly fueled a huge speculative rush in rising oil prices, which, not
coincidentally, corresponded with real gains in crude prices.
this point, there are very few short positions left in oil, while a massive
volume of long bets have built up. That suggests two things, both of which
are bearish for oil: there is not a lot of money left to go long, lowering
the chances of further prices gains; and the potential for a correction in
prices is very high at this point. Indeed, in the most recent week for which
data is available, net-long positions declined a bit, raising the
possibility that bullish bets have peaked. All it will take is a bit of
bearish news to spark a downturn in prices.
There are a few minor
worrying signs for oil prices that could crop up as additional bearish
forces in the next few weeks. The U.S. DOE
announced on January 9 a "notice of sale" from its strategic petroleum
reserve, with plans to sell 8 million barrels for delivery over the course
of February, March and April. Meanwhile, Libya is seeing rapid gains in oil
exports after the reopening of a key export terminal, with output
jumping to 700,000 bpd, according to the latest data, up sharply from
the 580,000 it produced in November and the 300,000 bpd it exported before
it started restoring output last summer. Moreover, Nigeria – which, like
Libya, is exempt from the OPEC deal – is intent on restoring production. It
may struggle to do that with the recent
shuttering of the Trans Niger Pipeline, potential
strikes from oil workers unions and the
announcement from the Niger Delta Avengers that attacks will resume this
year. In fact, production appears to have declined in December,
falling 200,000 bpd to 1.45 mb/d, becau se of some of these issues. But
if those problems can be overcome, Nigeria has latent production capacity
that could come back online at some point.
And in a sign that there
is not a lot of room on the upside, a kerfuffle in the Persian Gulf over the
weekend did nothing to affect oil prices. A U.S. Navy destroyer fired three
warning shots towards Iranian ships, an incident that in the past would have
led to a sharp, even if brief, rally in crude prices. Instead, the markets
shrugged off the incident – WTI and Brent sank on the first trading day
after the event, on unrelated news. "The market is overbought and under a
lot of downward pressure," Bob Yawger, director of the futures division at
Mizuho Securities USA Inc., told
Bloomberg. "The shots fired at the Iranian boats in the Strait of Hormuz
didn’t do anything to the market. A few years ago that would have added a
couple dollars to the price."
Share the link of this article with your facebook friends