Mar 03, 2017 03:45 PM IST | Source:

Crude oil – Too non-volatile to be true

Money managers boosted their bets on rising West Texas Intermediate prices to a record on speculation that OPEC and its partners would ease the global supply glut.

Ravindra Rao

Uncertainty continues as OPEC output and rising US rig-count would be the driving force for oil in 2017. Ever since the Organization of Petroleum Exporting Countries sealed an internal deal as well as one with a major non-OPEC, Russia, to cut production from 1st January to June 2017 to support falling prices, WTI prices have been steadily rising. In fact, from the date of the Vienna meet, 29th November 2016, oil has risen 23%. The bulls and bears are now fighting near $55 to get a grip on oil. The confusing thing is that, since January 2017, oil is trading within a tight range of $50 and $54. OPEC claims 86% of deal compliance has been achieved till 22nd February. There is no news of any OPEC member ditching the deal. On the other hand, the US rig-count is increasing due to rising WTI prices. This is something the market expected. Rising WTI prices render US shale-oil drilling financially viable, and every week the EIA’s report shows the rig-count rising (see chart below). The US rig-count (shown by the white line) has gone up since May 2016 to 602 on 24th February.

Because of the rising number of US oil rigs, total inventories on 17th February hit a record 518.6 million barrels according to the EIA. This puts considerable pressure on oil, though bears have been disappointed. The reason is OPEC’s commitment to bring price stability to the oil market. Last week, OPEC immediately came out in rescue of oil as the former showed readiness to extend the output-cut programme to H2 2017 and even to deepen cuts if necessary. So, once again bulls got active.
According to OPEC’s latest report, the club and its partners have reached 86% of their agreed cuts. Crude imports by OPEC’s Saudi Arabia decreased by 393,000 barrels a day last week to 1.06 million, according to preliminary EIA data for week ending 17th February. U.S. weekly imports of Saudi crude fell 27% to the lowest since December. OPEC production and the pace of U.S. drilling in 2017 would be the most significant drivers of crude oil balances and prices. The ambiguity surrounding the OPEC production accord has added volatility to oil prices. Besides, a more optimistic commentary from U.S. management teams implies more stable output, with a possible return to volume growth. Even Russian production heading into next year is high. Although global demand may have improved, the pace is unsteady.

Money managers boosted their bets on rising West Texas Intermediate prices to a record on speculation that OPEC and its partners would ease the global supply glut. Oil has been bound to the tightest price range in more than a decade, yet hedge funds have never been so confident it would eventually rally. The only thing is OPEC will have to keep production low once the accord expires in June. The market may tank once June arrives and OPEC decides not to extend the deal. However, before that, we expect the positive momentum to continue on track. Recently, the Iranian Oil Minister said that an oil rally above $60 a barrel would ultimately hurt OPEC because it would spur competitors to boost production and trigger a medium-term price drop. The US recently imposed new sanctions on Iran after the latter’s missile test recently. The US administration said that Iran’s continuing support for terrorism and development of its ballistic missile programme poses a threat to the world. The Iran government claims this is baseless and provocative. If such tension rises in coming sessions, we may see a spike in oil. Sentiment now supports oil prices. From the day OEPC started cutting output (1st January), prices have comfortably held above $50. As long as the psychological level of $50 is not breached, we are upbeat for March.

The author is Head - Commodity Research & Advisory at Anand Rathi Commodities
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