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Changing sentiments cloud oil rally

Updated February 11, 2018

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Crude sentiments change, and, rather rapidly.

Hardly a couple of weeks ago, crude markets were rallying and rallying. On various counts, 2018 has been kind to oil markets.

The Organisation of Petroleum Ex­­por­ting Countries’ (Opec) output res­traint seemed to be working wonders.

The demand-supply balance was in the making — considerably before than anticipated. Crude demand growth was healthy — better than initially projected.

In fact, just a couple of weeks back, the Saudi oil minister Khalid Al-Falih seemed to brush aside the spectre of the US oil boom challenging the Opec in a real sense, as the International Energy Agency has been underlining. And Falih had a point then. Brent had crossed the mid-$60 mark. WTI was not too far behind.

Analysts seemed more confident — the $70 a barrel mark was just around the corner. But all that changed — literally overnight.

Markets are now slipping, shedding in the process, all that had been achieved over 2018. Last week, oil skid to its biggest weekly loss in two years.

On Friday alone, futures in New York lost almost $2, settling below $60 a barrel for the first time this year.

WTI for March delivery slid $1.95 to settle at $59.20 a barrel on the New York Mercantile Exchange, the lowest since Dec 22.

For the week, futures declined 9.6 per cent, the most since January 2016. Brent for April settlement declined $2.02 to end the session at $62.79 on the London-based ICE Futures Europe exchange.

A rout seems in play. At the beginning of the last week, the ongoing oil price rally came to an abrupt halt. Market players were already weary of a correction — even before the meltdown began. Hedge fund and money managers appeared restive. A correction was in the air, many felt.

Consequently, a number of hedge fund managers were seen trimming their bullish bets on oil futures. This was the first cut, in net-long bets, in almost six weeks.

Though the reduction was small, it did give a hint that investors were skeptic of the ongoing oil price rally.

But there was much more to the oil story last week. The announcement by Iran last Thursday, saying it planned to increase crude production over the next four years — by at least 700,000 barrels per day — helped dampen some spirits in the market.

Yet, the biggest story of the week, changing the crude oil sentiments altogether, was the unprecedented rise in the US output and its impact on the oil markets, proving minister Al-Falih utterly wrong.

The US Energy Information Administration (EIA) reported that the US domestic crude output rose last week to a record high of 10.25mbpd. This meant the domestic US crude output increased for a fourth week, by 332,000bpd.

For the first time in almost five decades, the US domestic output has touched that level. At 10.25mbpd, US output is now higher than the previous 10.04mbpd recorded in the 70s.

The US output is now above that of top exporter Saudi Arabia and close to the top producer Russia. Reports are also saying the upsurge is destined to continue, at least in the near future. The EIA’s Short-Term Energy Outlook is maintaining that the US oil production would top 11mbpd this year. Last month, the agency said that the US wouldn’t hit that threshold until November 2019.

The revision from just a few weeks ago is dramatic, says Nick Cunningham. In January the EIA estimated that the US would surpass 10mbpd at some point in February. But recent data shows that the US actually hit that milestone last November.

On an annual basis, the US produced 9.3mbpd last year. Now in view of the increased domestic output, this is set to jump to 10.6mbpd in 2018, the EIA is now saying.

In hindsight, it now seems that the Opec-led restraint was arguably the biggest enabler for America’s output boom.

In the process Opec, also has lost some market share to non-Opec competitors, as were stressing for some time now.

Will Opec be forced to get back to the market share battle — remains a moot point at the moment?

Once Prince Mohammad bin Salman effectively took over the country, it shed the battle for markets share, as he desperately needed crude prices to go up — not just to bankroll his political ambitions — but also to ensure interesting returns once Aramco IPO goes under the hammer.

All that could be under some cloud now!

Published in Dawn, February 11th, 2018

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