Crude couldn’t escape a glut in ’17
This year has seen the oil markets driven by oversupply and geopolitical concerns.
January — March
The first quarter of 2017 saw the worst performance of oil prices in nearly two years. Much of the negativity was driven by concerns that increasing US shale output was undermining the Organisation of Petroleum Exporting Countries’ (Opec) attempts to balance the markets. Questions around compliance with the group’s production cuts were the focus in March, following reports that Russia failed to reduce its crude output in February. This, coupled with US data showing domestic crude inventories at a record high, sparked a sharp selloff that saw oil prices hit four-month lows on March 22.
April — June
A week-long shutdown of Libya’s largest oilfield in early April, followed by further issues with a blocked pipeline, meant that Q2 began with a reduced focus on oversupply. Instead, uncertainty surrounding the Syrian conflict and its threat to supplies, coupled with a reduced output from Libya, saw WTI crude hit five-week highs of $53.20 on April 11.
News from two of the world’s largest exporters — Saudi Arabia and Russia — that production cuts could be extended by another year gave oil markets a boost in early May. The rally was short-lived however and the spectre of oversupply again reared its head towards the end of June, following reports that Libya and Nigeria — both exempt from Opec production cuts — accounted for half of the group’s production increase in June. Major oil producers again reiterated their commitment to production cuts, but investors failed to take comfort from these assurances.
July — September
The first week of July left the bulls with a sour taste in their mouths as WTI crashed to $47 on reports that Opec production had hit its highest level for the year so far. It looked as though increased production from Libya and Nigeria would be enough to sabotage the efforts of the rest of the group. Rising oil production in the US only heightened concerns and meant that oversupply was again the dominant market theme as the third quarter got underway.
Reports from the Energy Information Administration (EIA) in early July, however, threw the market a lifeline. The EIA revised its forecast for 2018 production down, and WTI crude rallied as investors were encouraged to profit take. A well-timed drop in US crude inventories supported the upside and encouraged the bulls.
The impact of production cuts was high on the agenda when Opec met in July and compliance was a major focus. There had been speculation that Opec would impose production limits on Libya and Nigeria, but it was in fact Saudi Arabia that expressed a willingness to make deeper production cuts during the meeting.
Despite this, oversupply concerns lingered, driving WTI crude down towards the $47.50 mark in late August. The third quarter was particularly challenging for the commodity, with market sentiment swinging wildly from bullish to bearish. The bears triumphed as September drew to a close and investors became increasingly sceptical about the group’s ability to balance the markets.
October — December
October’s Opec meeting excited traders and saw the group hint at taking “extraordinary measures” to rebalance the oil markets long-term. There were even calls on US shale to join the production cuts, suggesting that the conflict between US Shale and Opec could be coming to an end. News that Saudi Aramco would cut 560,000 bpd from November further demonstrated the group’s ongoing commitment to reducing the supply glut.
Heightened tensions in the Middle East were played out in the oil markets and estimates that the Iraqi-Kurdish conflict had taken around 350,000 bpd of Kurdish oil offline, pushed WTI crude to $52 on October 17. Political tensions in Saudi Arabia in early November saw the commodity hit two-year highs. Opec’s meeting on November 30 decided to extend the production cut beyond March 2018. This has provided short-term support.
Early in November, crude bulls were taking encouragement from mounting geopolitical risks, but this was hardly a solid foundation on which to build a rally. This was confirmed on November 14 when oil prices were vulnerable to heavy losses thanks to a depressing outlook for global demand growth in a report from IEA, while speculations of US shale production rising have compounded to the downside.
With oversupply concerns still a lingering theme and Opec recently forecasting slower growth demand for its crude, December may be the month where sellers launch a fresh assault. The writer is global head of currency strategy and market research at FXTM. Views expressed are his own and do not reflect the newspaper’s policy.