Stretched long positions and rising Libyan crude oil production

Brent crude oil jumped into the year by gaining as much as 2.7% during the first part of the day yesterday. It broke above last year’s high ($57.89/b) and reached an intraday high of $58.37/b before tumbling down again ending the day at a 2.3% loss at $55.47/b. Positive Chinese statistics, equity gains in Asia, Europe and the US was part of the tailwind helping crude oil higher at the start of the day yesterday. Signals that Oman and Kuwait are fulfilling their OPEC cut obligations together with expectations that Saudi Arabia will lift its official selling prices (OSPs) for February loadings also helped drive the positive gain at the start of the day. The gains didn’t hold however and Brent crude just went downhill in the afternoon with no obvious headline driving it lower. What is clear though is that we have entered the year with a record high level of net long speculative positions in WTI making the price very vulnerable for set-backs and what we saw yesterday was clearly such a setback. This morning Brent crude is recovering 0.2% to $55.6/b as it rebounds after yesterday’s sell-off. Positive equities and gains in industrial metals this morning as well as expectations that US crude oil stocks will show a decline of 2.3 mb in tomorrow’s statistics are ingredients helping to drive a slight gain in Brent crude this morning.

Even though OPEC now has started its cuts which will be constructive for oil prices in H1-17 we are not necessarily set for an immediate price take-off. One problem is the very high OPEC production in Q4-16 of more than 34 mb/d which will linger in the oil market through parts of Q1-17. Another is the still probably record high WTI speculative positions which opens up for price set back vulnerability. The still rising crude oil production in Libya is also creating concerns that OPEC’s cuts might be less effective. Lastly we also have the fact that it usually takes 6-8 weeks from when oil prices rise until this leads to a stronger rise in US oil rigs. Thus even if there was a strong rise in US oil rig additions in December (+51 rigs and highest monthly rig addition since March 2014) this was most likely not due to OPEC’s decision to cut and the $5/b higher crude oil price following from that. It is still only 5 weeks since OPEC decided to cut. This means that a boost to US rig count following OPEC’s decision to cut production is still ahead of us. Thus January and February should probably show strong gains in US rig count. This will sentiment wise weight on oil prices. Hedging by the oil producers adding these rigs will also weight on the 12-24 mth price curve.

Kind regards
Bjarne Schieldrop
Chief analyst, Commodities
SEB Markets
Merchant Banking