Crude oil prices started April in the midst of a strong uptrend that continued into mid-month. The move ended after with a dramatic technical reversal at the end of six day winning streak. The rally was primarily driven by aggressive hedge and commodity fund buying as money managers continued to increase bullish bets on a crude oil short-fall. The catalyst behind the buying was growing compliance with the OPEC-led plan to cut production, trim the global supply and stabilize prices. Traders primarily ignored signs of increasing U.S. production as rumors began to surface that OPEC and other non-OPEC producers were strongly considering an extension of the program to limit output beyond the June deadline. Crude oil began easing from its high at $54.14 on April 12 as rising U.S. shale oil production offset concerns over geopolitical tensions in the Middle East and output cuts being made to support prices. U.S. crude inventories also touched record highs at both the U.S. storage hub at Cushing, Oklahoma and in the U.S. Gulf Coast. In addition, the U.S. rig count continued to increase throughout April, setting a bearish tone for increased production into the future. Heaving selling on April 19 signaled massive hedge and commodity fund liquidation with the market dropping nearly 4% in one session. This also set in motion a sell-off that eventually drove prices to $49.20 before settling the month at $49.33, down $1.74 for the month or -3.41%.
March has turned out to be a volatile month for the oil prices as they crashed during the early part of the month but they managed to turn it around and were able to recover a part of the move down during the last week of the month. The oil prices had been spending a couple of months in the range between $53 and $55 and it was getting to a stage where the traders were beginning to lose interest in trading oil as it was stuck in the highs of the range and refused to move in either direction for several weeks. It was during the month of March that the market began to slowly realise the scale of data that was coming in and realised that the incoming inventory and production data did not show as much a drop as was expected when the agreement between the oil producers was sealed. They had expected the production and the inventory to slow down, gradually pushing the prices higher and higher but with the North American producers increasing the production, the oil supply did not get the drop that it was supposed to. This finally dawned on the oil traders who sold off oil in the early part of March. The sell off was only for a couple of days but that was enough to push down the oil prices by around 12% and through the important figure of $50. This was a huge blow for the bulls and for 2 weeks, they could not break back through $50 cleanly and it was only towards the end of the month, that the oil inventory began to show signs of drying up, the oil producers seemed to be confident of continuing their deal beyond the middle of the year and the Libyan oil production also tailed off and all these events were enough to push the oil prices above $50 where it stayed to close the month. Looking ahead to April, we believe that the oil prices have come out of the rut below $50 and are here to stay above it for good. This is what the bulls would also hope for and it is important to watch out for the production and inventory data to see for signs of continuing fall or for signs of them picking up and these are the data that are likely to guide the oil prices in the coming month. We believe that the prices would range between $50 and $55 in the coming month if the incoming data is as expected. Else, the oil prices are likely to fall below $50 again and if that happens, the bulls would be finding it very difficult to break back above the important figure again.
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.