U.S. West Texas Intermediate crude oil futures finished February slightly higher. The range was extremely tight as rising U.S. production continued to offset increased compliance with OPEC’s planned output cuts. April WTI crude oil finished at $54.01, up $0.59 or +1.10%. The range for the month was an extremely tight $3.17. U.S. production continued to rise last month with inventory increasing every week to end the month at a record 520.2 million barrels. The number of rigs drilling for oil also continued to increase, ending February at 602 rigs, up about 36 rigs. According to Reuters, OPEC reduced its oil output for a second month in February. Its data showed that the cartel boosted strong compliance to around 94 percent. Saudi Arabia reduced production by more than it pledged. Russia has cut production by a third of its pledge. Finally, government data showed hedge funds hold a record net long position in crude oil futures and options.
The month of January saw the beginning of the implementation of the OPEC deal between the oil producers to cut oil production as a means of increasing the falling oil prices. This was agreed among oil producers at the OPEC meeting last November, and we saw the oil prices consolidate and range for the whole of this month. Despite initial doubts, the implementation has been going on as per plan and the OPEC members have expressed happiness about it but the oil prices have not been able to breakout from its range as there are concerns about growing oil reserves from the North American countries that are not part of the pact. Though the OPEC and non-OPEC members have been diligently implementing the deal, the incoming data does not yet show any major changes in the reserves or the supply of oil and unless this starts showing up in the data, we are unlikely to see oil prices move higher. The ultimate target for the oil price would be around $60 and it is this average price that the producers would also be aiming for. But these prices would be difficult to achieve if the North American producers continue to pump large amounts of oil into the system as it then affects the overall supply and demand ratio and hence, oil prices would not be able to rise further. Looking ahead to February, the oil bulls would be hoping that the deal continues to hold in the midst of all the political tensions and would also expect the incoming data to show the contraction in supply so that the oil prices can break out of the topside of their range and towards the short term target of $55 and medium term target of $60.
Crude oil posted a solid gain in December, driven by late November’s decision by OPEC to cut production starting January 1. There have been many doubts throughout the year as to whether the cartel could form a united front to deliver such a deal, but from the market’s performance this month, it looks as if investors are going to give them a chance to succeed. The initial plan called for OPEC to reduce production starting in January by 1.2 million barrels per day, or over 3 percent, to 32.5 million bpd. Top exporter Saudi Arabia said it would cut as much as 486,000 bpd. The news fueled a rally by U.S. West Texas Intermediate Crude Oil from $46.62 to $54.26. After a short-term setback to $51.80, the market spiked higher to $56.24 on December 12 as investors reacted to the news that producers from outside OPEC agreed to reduce output by 558,000 bpd. Russia pledged to cut the most among the non-OPEC countries at 300,000 bpd. The buying stalled after the jump to $56.24 as investors started to express doubts that the plan would work fast enough to reduce supply and stabilize prices. Additionally, investors became concerned over rising U.S. oil output and total supply as producers continued to put more oil rigs to work. Going into the end of the month, prices had become rangebound as several countries told customers of the upcoming supply cuts and Libya ramped up production. As of the close on December 23, March WTI Crude Oil was up 5.29% for the month.
It was quite a month for January West Texas Intermediate Crude Oil futures in November. The markets were on a rollercoaster ride through the month, influenced by OPEC’s ability to carve out an agreement to cut and cap production. This lead the WTI to an intra-month low of $43.32 before November 30th surprise announcement by OPEC, carving out a 1.2m bpd cut in production from January 2017. This represents the Cartel’s first cut since 2008 and the first joint OPEC – Russia joint agreement to cut production since 2001. Heading into the Vienna meeting, the rhetoric was in full swing as the Saudis intimated an unwillingness to cut production if all Cartel members didn’t follow suit, though in the eleventh hour it was the Saudis themselves who took the biggest hit, agreeing to cut production by 0.5m bpd. Russia followed on with an agreement to cut production by 0.3m bpd, accounting for half of the 0.6m bpd cut agreed by non-OPEC members, though Russia ultimately will cut production by the 0.3m bpd through the first half of next year. WTI and Brent rallied 9.31% and 8.82% respectively on Wednesday, off the back of the announcement with the markets pushing the WTI to a monthly 5.5% rise leading to a closing price of $49.44. It was not a smooth ride after all, with Indonesia threatening to suspend its membership, refusing to cut production by 37k bpd, after having only re-joined earlier in the year. As the dust settles, the markets will likely begin to consider how U.S shale producers will respond to the agreement as the U.S active rig count has risen from 441 to 474 through the month.
October has seen a continuous and steady rise all through the month in the oil prices which is just a continuation of the rise generated due to the decrease in the supply of oil from the OPEC producers based on the deal that they reached on September 28. Credit goes to them in that they have successfully managed to cut the oil production without any major diplomatic gaffes (though Iraq has refused to cut the production) and this reduction has helped oil price to move from $48.3 to as high as $52.3 during the course of the month.
Towards the end of the month, we see a correction in the oil prices due to general USD strength and also due to oil inventory data which continue to remain high despite the production cuts. Oil prices have also met a wall in the region between $52 and $53 which has proved to be a tough nut to crack even during periods of USD weakness and growth in commodity prices. We did see multiple attempts to break this price range but all have been unsuccessful so far.
The coming month would be crucial as the OPEC producers meet again in November to discuss further progress in the production cuts and it is expected that they would announce the specifics of production cuts including the amount and also the countries that would be doing the cuts as such. Once the details of the deal emerge and if they do successfully strike out a deal between the producers, we could see the next bullish run in the oil prices which may be enough to break the wall and head towards $55 and beyond.