Crude oil, market participants have moved from the euphoric stage back to the show me stage regarding the new OPEC production deal. The market sold off modestly today in a round of profit-taking selling as the next hurdle approaches: Saturday’s OPEC/non-OPEC meeting in Moscow. Some market participants are starting to become concerned that even if the next hurdle is achieved the most important hurdle—compliance to the deal—may be a lot more difficult to achieve based on OPEC’s history.
That said, today’s price retracement was less than 2% in a market that has risen about 15% since the OPEC deal was announced last week. An additional caution flag was raised today when it was reported that OPEC’s production hit a record high level last month (per Reuters) suggesting that even if OPEC does go through with the cuts it will be off a very high base and may not result in the market rebalancing as quickly as many are anticipating.
For the moment, the major initial move to the upside may now be over as the market moves into a mode of wanting to see addition bullish news before adding new money flows into the market from the long side.
This afternoon the API started the weekly inventory report cycle with a mixed report showing a slightly larger than expected draw in crude oil stocks, a larger than expected build in distillate fuel stocks and a build in gasoline inventories within the market expectations. Overall the market reacted minimally to the API data in post inventory trading.
Today the EIA released their latest Short Term Energy Outlook Report (STEO). Following are the main oil highlights from the report.
• U.S. crude oil production averaged 9.4 million barrels per day (b/d) in 2015, and it is forecast to average 8.9 million b/d in 2016 and 8.8 million b/d in 2017.
• At its Nov. 30 meeting, members of the Organization of the Petroleum Exporting Countries announced a framework for supply reductions among most of its members. Several non-OPEC producers also announced their intention to freeze or reduce production. The extent to which the announced plans will be carried out and actually reduce supply below levels that would have occurred in their absence remains uncertain. If the agreement contributes to prices rising above $50/b in the coming months, it could encourage a return to supply growth in U.S. tight oil more quickly than currently expected. Crude oil prices near $50/b have led to increased investment by some U.S. production companies, particularly in the Permian Basin. A price recovery above $50 per barrel could contribute to supply growth in other U.S. tight oil regions and in other non-OPEC producing countries that do not participate in the OPEC-led supply reductions.
• Continuing global supply growth in 2017 may postpone significant global inventory withdrawals until 2018, with the first half of 2017 showing inventory builds averaging 0.8 million b/d in our current forecast. Global inventory builds are forecast to average 0.4 million b/d for all of 2017. Despite new oil production coming online when oil inventories are at high levels globally, global economic data have been more positive than previous expectations, and increases in oil demand growth could help to support prices in the coming quarters.
• Oil production, particularly in the United States, has been more resilient in the current oil price environment than had been expected, as reflected in improving financial conditions at oil companies. Improved profits could encourage oil producers to increase capital expenditures and expand production in 2017 and beyond, especially if oil prices increase.
• EIA revised the U.S. crude oil production forecast upward from the November STEO, with average 2017 production expected to decline by less than 0.1 million b/d from 2016 levels. Total U.S. liquids production, which includes production of hydrocarbon gas liquids (HGL) and biofuels, is expected to increase by 0.2 million b/d in 2017.
On the financial front, equity markets were higher with eight of the 10 markets in the Index all gaining value today. The overall EMI Global Equity Index increased by 1.08% for Tuesday’s trading session with the year to date gain widening to 15.2% and only slightly below the highest level of the year to date hit during the week of Oct. 21. Seven of the ten bourses in the Index remain in positive territory for 2016. China remains in the worst performer spot in the Index with Brazil remaining on top with a 40.9% gain for the year. The positive value direction in global equity markets on the day was a positive price driver for the oil complex.
On the currency front, the U.S. dollar Index traded higher on the day with the Japanese yen/U.S. dollar (JPY/USD) currency pair and the Euro/USD lower. Overall the currency markets were a negative price driver for the oil complex on Tuesday.