Oil prices brief July 16: Prices ease on output concerns, higher consumer demand only real fix

Oil prices

One analyst said the market is quiet on Monday and “it feels like wait and see.” Nabors photo.

Oil prices supported by share drop in US crude stocks

Oil prices fell on Monday by about one per cent as investors’ concerns about increasing global stocks were overshadowed by strong indications that the OPEC-led supply cut pact is working.

Brent crude fell 49 cents to settle at $48.42/barrel and US crude was down by 52 cents to $46.502/barrel.  Earlier in the day, prices had reached their highest level since July 5.

According to the Baker Hughes report, US drillers added two oil rigs last week, bringing the total to 765.  In the past month, rig additions have slowed to their slowest growth pace since November.

Despite the slowdown, US shale oil production was forecast to rise by 112,000 barrels per day (b/d) to 5.585 million b/d in August.

“The idea of higher production levels, particularly in the U.S., Libya and Nigeria … I think that seems to have been priced in for the moment,” Gene McGillian, manager of market research at Tradition Energy told Reuters.

“I am sceptical. I think the market has bounced but it’s having trouble finding traction to move higher probably because some the drop off in inventories are likely due to gasoline demand picking up.”

Crude stocks in the US fell last week by more than analysts had expected.  Despite the drop, high crude inventories in all industrialized nations remain a concern for investors.

“The market is not doing too much today – it feels like wait and see,” Olivier Jakob of oil analyst Petromatrix told Reuters. “There is some rebalancing in products, but overall the layers of stocks are still very large.”

Oil prices sit at less than half their mid-2014 value due to the stubborn global glut.

Consumers key to balanced global oil market in 2019 says Dallas Federal Reserve

Higher inventory levels may be a new normal that markets need time to adapt to—at least until consumption catches up with global supply. Consumer demand remains the centerpiece of achieving market balance, according to the Q2 update from the Federal Reserve Bank of Dallas.

Source: Federal Reserve Bank of Dallas, Q2 update.

The average expectation for quarterly global consumption growth is 1.4 million b/d through the end of 2018. This demand figure may be boosted by a healthier outlook for the global economy.

US producers have demonstrated some ability to fill the void left by OPEC in world markets, and their ability to do so continues to evolve. This may dampen OPEC’s willingness to extend or deepen its existing agreement at future meetings.

If recent data are evidence of future compliance with quotas, nearly 1.6 million b/d of production may return to world markets when the agreement expires. In short, data and projections from second quarter 2017 suggest there will be sufficient global crude oil supplies to meet demand growth through at least 2018, assuming that no new significant disruptions, unplanned outages or periods of low prices undercut current projections.

When asked in mid-June, “In what quarter do you think it most likely that the global oil market will come into balance?” the majority of respondents to the Dallas Fed Energy Survey indicated the second half of 2018 or later.

Twice burned, hedge funds wait for clear sign of oil rebalancing

By John Kemp, Reuters market analyst

Hedge funds have continued to cover their short positions in crude and refined products, but the impact on oil prices has been surprisingly muted so far, with a much smaller rally in prices than expected.

Hedge funds and other money managers reduced short positions in the five main futures and options contracts linked to petroleum prices by a combined 69 million barrels in the week to July 11.

Fund managers have cut the total number of short positions over two weeks by 116 million barrels, falling from a record 510 million barrels on June 27 to just 394 million barrels on July 11.

Over the same period, total long positions increased by just 10 million barrels, rising from 815 million barrels to 825 million barrels, according to regulatory and exchange data.

Short covering was widely expected after hedge funds established record or near-record short positions in most contracts by the end of June (“Hedge funds walk into a bear trap in oil”, Reuters, July 3).

The concentration of short positions and relatively small number of long positions left the market looking stretched on the downside. Crowded trades such as this have often preceded a sharp price reversal in the past.

But instead of rallying, crude prices generally declined over the week between July 3 and July 11, and have only risen modestly since, indicating hedge funds found plenty of willing sellers as they closed their short positions.

If oil traders became less confident about further falls in prices, there was no sign of them positioning for a rebound.

Sentiment remains bearish despite the sustained draw in U.S. crude stocks, record U.S. refinery runs and repeated verbal interventions by OPEC sources.

Hedge funds built large bullish positions twice earlier this year, in February and April, anticipating a tightening oil market and higher prices, only to be disappointed and incur significant losses both times.

With investors’ patience wearing thin, few managers can afford to be wrong a third time, so many seem to be waiting on the sidelines until signs of market rebalancing are unambiguous.

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