Rising US Output Curbs Gains amidst Tightening Supply

OPEC to reduce output by about 1.2 million bpd from January 2017

Oil prices edged higher on Monday, February 27th, 2017, with Brent oil set to rise for five out of seven sessions as a global supply glut appears to ease, as reported by Reuters. However, the rising US production limited gains, when data from the US Energy Information Administration (EIA) showed that domestic production was about 8.9 million barrels per day (bpd) in 2016 and is expected to climb to 9 million bpd in 2017 and 9.3 million bpd in 2018. While most of the world’s leading oil producers have agreed to slow down in 2017, US production is expected to grow. Brent crude oil LCOc1 climbed 0.2% to $56.09 a barrel, while US West Texas Intermediate CLc1 added 0.1% to $54.04 a barrel.

Oil prices tumbled on Friday, February 24th, 2017, after EIA data showed US crude inventories rose for a seventh straight week. EIA data showed stocks rose 564,000 barrels to 518.7 million last week, higher than the levels of 478.2 million bpd in December 2016, and much higher than 468.7 million bpd in January 2016. However, the market has been supported within a tight $4 to $5 range since November 30th, 2016, when the Organization of the Petroleum Exporting Countries (OPEC) and other producers agreed to cut production to 32.5 million bpd from the levels of around 33.24 million bpd.

Moreover, crude oil prices also fell when Baker Hughes data as of February 24th, 2017, showed another pickup in US drilling activity. US rotary rig count was up by 3 to 754 during the week, about 252 rigs or 50.2% higher than the rig count for the same period last year. The number of rotary rigs drilling for oil was up 5 at 602. There are 202 more rigs targeting oil than last year. Rigs drilling for oil represent 79.8% of all drilling activity.

OPEC reaches record compliance

OPEC’s record compliance with the production cuts deal has surprised the market, and the biggest laggards, the United Arab Emirates and Iraq, have pledged to catch up with their targets. The IEA estimated OPEC’s average compliance at a record 90% in January 2017. Saudi Arabia, OPEC’s largest producer which raised oil production to record levels in 2016, promised to reduce output by 486,000 bpd to 10.05 million bpd. Saudi has delivered on its promise to cut production, and said that its output had fallen below 10 million bpd to levels last seen in February 2015 and that it expects to make even deeper cuts in February 2017. Saudi has offered to reduce oil production further if rival Iran caps its own output this year, as Riyadh tries to strike an elusive OPEC deal to curtail supply and boost prices.

Money managers raise net long positions

Money managers raised their net long positions on US crude futures and options in the week to February 21st, 2017, to the highest on record, based on data going back to at least 2009, according to the U.S. Commodity Futures Trading Commission (CFTC). Meanwhile, passive investment funds are poised to shift an estimated $2 billion from far-term to near-term crude futures over the next week, anticipating an energy market rally as a historic OPEC output cut slashes supply. The switch may foreshadow the end of a global oil glut that built up during a two-year price war.

Investors will need to start the shift on March 01st, 2017, and complete it over the next five business days, moving 20% of their money each day, which is estimated to impact between 35,000 and 45,000 Brent contracts. Each contract represents 1,000 barrels. Accordingly, about 40 million barrels worth about $2 billion is set to change hands.

A positive impact from OPEC’s output cut has resulted in tightened supply, prompting US traders to start selling oil from more expensive storage facilities because it is no longer possible for them to make a profit by holding oil. Moreover, the narrowing contango has resulted in tens of millions of oil barrels being forced out of storage. That could put downward pressure on prices in the short term; however, the move to unleash stored oil is viewed by analysts as a first step toward rebalancing global markets after a period of oversupply.

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