Today's edition of the Saxo Morning Call features the SaxoStrats team discussing the continuing weakness of the US dollar as commodity prices recover ground and in the wake of key US equity indices hitting all-time highs Thursday.
Article / 29 November 2017 at 10:16 GMT

Oil softer on US stock rise and Opec nerves – #SaxoStrats

Head of Commodity Strategy / Saxo Bank
  • Oil drifts lower ahead of crunch Opec meeting
  • US stock rise is weighing on crude
  • Russia seems unwilling to commit to extension

 Prices depressed by unexpectedly large stocks in the US. Pic: Shutterstock

By Ole Hansen

Oil has been drifting lower the day before Opec ministers sit down in Vienna to drum out an extension cut deal. Not least after the API last night reported a surprise build up in weekly US stocks. Much is at stake in Vienna with Russia seemingly not yet prepared to commit to a nine-month extension without a proper exit strategy. 

Energy reporters from all the major news agencies around the world have gathered in Vienna in search of news from delegates as they arrive. Most of these are actively using Twitter and the hashtag #OOTT to communicate the latest news. 

WTI crude oil drifting lower as Keystone pipeline supplies resume. Using retracement levels, support is currently found at $57.40/barrel with a break below $56.40/b needed before increasing the risk of a deeper correction.  
WTI Crude Oil, 4 hr
Source: Saxo Bank 

With oil ministers from Saudi Arabia and Russia yet to arrive in Vienna the comments have so far been provided by minor producers and the consensus points towards the inevitable extension of the deal to curb production beyond the end of its March expiry date. But what still remains uncertain is the duration of such a deal and also how to eventually end it without risking flooding the market with unwanted barrels. 

As we're all aware, money managers have been active buyers of crude oil since July. The combined net-long in Brent and WTI was close to 900 million barrels in the week to November 21, not far from the February record of 930 million. Opec has over the years become increasingly aware of the impact of speculative positioning in the oil market. They know that failing to deliver what the market expects and has priced in could trigger a major correction due to position adjustments. 

Speculative positioning in WTI and Brent crude oil
On that basis, we expect Opec will deliver an extension of 6 to 9 months and in order to satisfy Russia, they may add a review date at a given point during the agreed period. Russian oil companies have increasingly become uneasy about curbing production for another extended period and this has raised the risk of non-compliance. 

Another topic which could lead to some heated discussion would be a discussion of whether Iran (+50k b/d), Libya (+350k b/d) and Nigeria (+230k b/d) should join the deal after having been exempt. These three countries have up until October increased production by more than 600,000 barrels/day so far this year and these extra barrels have been one the main reasons why the production cut deal only really began having an impact during the second half of 2017 when demand picked up. 

First up today, however, we have the "Weekly Petroleum Status Report" from the US Energy Information Administration at 15:30 GMT. 

The price softness so far today has been driven by the surprise increase in oil stocks being reported by the American Petroleum Institute. As expected, the pipeline disruption from Canada which lasted for more than a week up until Tuesday did reduce stocks at Cushing, the delivery hub for WTI crude oil futures in Oklahoma. The 3.2 million barrel reduction, if repeated by the EIA, would be the biggest one-week reduction since 2009. 

Despite the pipeline disruption the API still recorded a rise in oil stocks which would have been the result of a 2.3 million barrel withdrawal from the US Strategic Petroleum Reserve and a combination of increased net imports and/or lower refinery demand. 

EIA survey and recent results

In response to the price rally in crude oil these past few months, US oil producers have during the past three weeks been adding back almost half the rigs that were withdrawn during the previous three months. Given the focus from Opec and Russia on US shale oil producers' ability to increase production, the weekly production estimate will also be watched to see if it hit a fresh record last week. 

– Edited by Clare MacCarthy


Ole Hansen is head of commodity strategy at Saxo Bank

Ole Hansen Ole Hansen
A fresh poll among 14 investment banks surveyed by the Wall Street Journal sees WTI crude oil average $53 in 2018 and Brent $56/b. Both being 2 dollars up from the October survey.
Link (paywall):
Ole Hansen Ole Hansen
The EIA has reported a bigger than expected 3.4 million barrel decline in crude stocks last week. This as supplies from Canada were disrupted through the Keystone pipeline. Lower imports also helped reduce stocks. Overall a muted reaction with gasoline and distillates both increasing by more than expected. Production rose by 24k b/d
Ole Hansen Ole Hansen
EIA charts
TastyTrend TastyTrend
Thanks Ole, Helpful like every time..


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