Crude Oil Price - Nov 20

[dan_s]

Speculators determine the short-term price of oil. Like a "herd" they tend to move in the same direction and they do not want to be too far away from the safety of the herd.

Reuters: "Hedge funds eliminate bullish bets. The bull market has now fully unwound after hedge funds and other money managers have sold off all the bullish positions they had accumulated since the second half of 2017. The last seven weeks has seen the largest liquidation of long positions since 2013. Long positions are now at their lowest level since January 2016 – a period of time that coincided with the very bottom of the oil market cycle."

Plus, hedge funds don't want to be long over a major holiday weekend.

Oil prices fell in early trading on Tuesday on persistent fears of oversupply. OPEC+ could cut output in two weeks’ time, but for now, volatility is here to stay. “The name of the game in the oil market is volatility,” IEA executive director Fatih Birol said at a conference in Oslo. “And with the increasing pressure of geopolitics on oil markets that we are seeing, we believe that we are entering an unprecedented period of uncertainty.”

In my opinion, oil is now over-sold but that certainly doesn't mean that it cannot go lower. "Markets can always stay irrational for longer than we think."

Alan Rozencwajg: "It has been a very frustrating time, but the opportunity offered today is extreme, and all of our readers must properly understand the underlying supply and demand dynamics in order to properly decide how to proceed."
"Already some market watchers are comparing this to the 2014/2015 period when OPEC produced at full-capacity, swelled inventories and then agreed to cut supply. However, this time inventories hardly built at all relative to seasonal averages, and today we are in a much healthier position than we have seen in years.'

"Many analysts are blaming the moderate surplus on rising US shale production or weakening global demand. While we continue to monitor both of these factors closely, we continue to believe that shale growth alone will not be able to meet growing demand and slowing conventional non-OPEC production. Instead, the recent sell-off was the result of a huge surge in OPEC production that was ultimately not needed. Whether OPEC made a mistake or was duped (by Trump) remains an open question, but now that the Iranian sanctions have been de-fanged we are not surprised to see OPEC considering rolling back production."


2019 Outlook by Goehring & Rozencwajg Team, November 15, 2018

In our last quarterly letter, we outlined our views for 2019 balances, but given the recent weakness we wanted to reiterate them again here. In their latest report, the IEA expects 2019 global demand to average 100.6 million b/d. We expect this figure will be revised higher, due to the persistent balancing item (or "missing barrels") that has averaged 500,000 b/d this year. This balancing item is almost always underestimated demand, and so we expect 2019 oil demand to reach 101.1 million b/d.

The IEA expects 2019 non-OPEC oil supply to reach 62.3 million b/d, based upon US growth of 1.3 million b/d and non-OPEC growth outside of the US of 620,000 b/d. We have explained why we believe non-OPEC growth ex-US will continue to disappoint given a huge reduction in capital spending outside of the shales. Already for 2018, non-OPEC ex-US production growth has been revised lower from ~600,000 b/d to 230,000 b/d. As a result, we expect 2019 figures to be revised down as well and for total non-OPEC production to ultimately average only 61.8 million b/d in 2019.

Assuming 7.0 million b/d of OPEC NGLs, we expect the so-called call-on-OPEC to average 32.3 million b/d. In October 2018, OPEC produced at 32.99 million b/d, however, as we discussed this was done in an attempt to make up for expected production lost to Iranian sanctions. As recently as May, OPEC produced at 31.8 million b/d – or 500,000 b/d below next year’s call. Saudi Arabia has signaled that it would cut production by 500,000 b/d in December, which would result in a balanced oil market for 2019.

Furthermore, the Saudi energy minister signaled he would try to get other OPEC members to agree to an additional 500,000 b/d cut at the December meeting. If they are successful (and we believe they will be), then oil inventories will begin declining again shortly, sending oil prices once again higher.

We cannot remember selling pressure as intense as we have seen over the last few weeks, but for those investors who are able to adopt a contrarian stance, take the time to understand the fundamentals, and stomach the volatility. We believe you are being presented with an excellent investment opportunity.
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MY TAKE: OPEC+ will do their job and on December 6 they will announce an agreement to cut production by 1.4 to 1.8 million barrels per day. Plus, a cold winter in the U.S. and Europe will put an even bigger strain on distillates. Distillate inventories are dangerously low. BTW so is U.S. natural gas.