Crude Prices Witness Bullish Trend Post OPEC Deal

OPEC members agree to reduce oil output to 32.5 million bpd from current 33.24 million bpd

Crude oil prices are witnessing a bullish trend after the Organization of the Petroleum Exporting Countries (OPEC), which met on the sidelines of the International Energy Forum in Algeria from September 26th-28th, 2016, agreed to reduce oil output to 32.5 million barrels per day (bpd) from the current levels of around 33.24 million bpd. Reacting to the news, Brent prices have breached the $50 per barrel level, holding steady at $52.59 as of October 11th, 2016, up from under $30 a barrel at the start of 2016, but well down from the $100 a barrel seen in 2014. After the first OPEC deal in eight years, futures also got a boost from a five-week stretch of falling U.S. crude stockpiles, as reported by Bloomberg on October 10th, 2016.

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Money managers increased their long positions in West Texas Intermediate (WTI) crude futures and options to the highest level in more than two years during the week ended October 4th, 2016, as per the Commodity Futures Trading Commission (CFTC). Bets on falling prices dropped for a second week. Brent longs also rose, leaving the combined length of the two benchmark contracts at a record.

Source: CFTC, Bloomberg
Source: CFTC, Bloomberg

Money managers’ long position in WTI climbed to 353,162 futures and options, while shorts fell 30%. The resulting net-long position jumped 40%, the highest level since May 2015. In the Brent market, money managers boosted bullish bets by 11% to 422,500 during the week, according to ICE Futures Europe. Speculative bets that prices will increase outnumbered short positions by 358,699 lots. WTI futures jumped 9% to $48.69 a barrel, streaking past $50 for the first time since June 2016. Prices were up 0.18% at $50.88 a barrel as of Tuesday, October 11th, 2016.

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U.S. stockpiles fall to lowest since January 2016

Meanwhile, U.S. crude stockpiles dropped by 2.98 million barrels to 499.7 million barrels in the week ended September 30th, 2016, for the fifth straight week and the lowest since January 2016, according to the Energy Information Administration (EIA). Crude inventories reached 543.4 million barrels in the week ended April 29th, 2016, the highest since 1929.

Source: EIA, Bloomberg
Source: EIA, Bloomberg

Focus shifts to November meeting

The focus now shifts to OPEC’s meeting in Vienna on November 30th, 2016, when the committee will decide on the production levels of each country. Market watchers believe that while the initial response to the OPEC agreement was positive, there are crucial questions that have been left unanswered by the organization. Analysts are seeking many details as to how much each country would have to produce to pull up oil prices to sustainable levels and rebalance the market glut. Also, there is not much clarity on when the agreement would come into effect, how compliance with the agreement would be verified, what would be the new output caps for each country, and how long the deal would remain in effect.

China’s oil output unlikely to rebound soon

Economists believe that oil prices may need to increase further before China’s producers make enough profits to reverse a drop in output to the lowest in more than six years. Chinese production is expected to only stabilize when crude prices breach $50 per barrel and may not rebound until they are above $60. China, the world’s fifth-largest producer in 2015, produced 5.7% lesser crude during January-August 2016, as state-run companies shut fields after they found it was commercially infeasible to operate amid the worst price crash since 2014.

Source: National Bureau of Statistics, Bloomberg
Source: National Bureau of Statistics, Bloomberg

China’s production fell 9.9% Y-o-Y to 16.45 million tons, or about 3.89 million bpd, in August 2016, according to the National Bureau of Statistics, and the lowest since December 2009. PetroChina Co. and China Chemical & Petroleum Corp., or Sinopec, both expect their domestic output to drop by about 6% in 2016. For onshore production to increase and remain commercially viable, crude prices must reach $60 per barrel since production costs are high because of the maturity of these oil resources.

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