Moneycontrol Pro Panorama | Oil on a slippery path (2024)

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Production cuts by OPEC+ are clearly not working. Despite the announcement of further cuts by the cartel, oil prices continue to slide and have touched a six-month low. Crude oil is down for seven straight weeks, the longest weekly losing streak since 2018.

The oil market is flooded with supplies even as demand refuses to pick up. API data shows a net build in crude oil inventories in the United States of just over 18 million barrels this year.

The US is not adding to its Strategic Petroleum Reserve (SPR) despite an announcement by the Biden Administration to do so. The Department of Energy (DoE) reported that crude oil inventories in the SPR stayed at 351.9 million barrels, with total purchases for the SPR coming in just over 5 million barrels (as compared to 180 million barrels sold in the last year) since the buyback program was announced in the second half of this year. The market is worried about global oil demand and rising inflation.

The worrying sign is that even though we are in the middle of the winter season, gasoline and other distillates inventories are rising. This week, it rose by 5.8 million barrels, on top of the 2.83-million-barrel in the week prior. Gasoline inventories are over one percent below the five-year average for this time of year, while distillates are 13 percent below the five-year average.

The weekly average of Russia's seaborne crude exports on the supply side jumped to the highest level since early July. Spreads between monthly contracts are the lowest since June 2023, indicating oversupply. The contango in the oil market indicates oversupply.

The US is also pumping more oil into the world market, replacing the lower output from OPEC+. The country is exporting close to a record 6 million barrels of crude oil per day.

Further, the lifting of sanctions on Venezuela, currently the lowest-price supplier in the market, has also added to the market pressure.

A Washington-based consultant's report on the long-term direction of the oil market has helped spread the bearish story in the oil market. Rapidan Energy Group says that OPEC+ must carefully control oil supplies for another five years to avoid a "meltdown" in crude prices. Global oil demand is not expected to peak for at least another decade, but supplies from outside OPEC — particularly the US — are growing faster than previously estimated.

Non-OPEC supplies will increase by 700,000 barrels annually by 2030, mainly from the US, Guyana and Brazil. Further, OPEC+ collectively has nearly 5 million barrels of spare production capacity daily.

Given the bearish outlook, traders have built up their position on the short side. Sell positions by Hedge Funds and traders equals roughly 58 million barrels in the six most important petroleum futures and options contracts over the seven days ending December 5. Fund managers have sold oil in nine of the 11 recent weeks, reducing their position by 385 million barrels since Sept. 19.

Oil market traders seem to be of the view that the OPEC+ cartel may resist any further cuts. Given this scenario, we may have more oil arriving in the market from non-OPEC players, which will help keep prices lower.

Though there may be some volatility in the market as the IEA, OPEC and the US Energy Department publish their latest monthly assessments of market fundamentals, oil's medium to long-term story is bearish.

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Shishir AsthanaMoneycontrolPro

Shishir Asthana

first published: Dec 13, 2023 03:18 pm

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