Why hopes of output cuts and trade deal haven’t got oil bulls excited

Crude oil prices ended last week on a negative note after settling at a two-month high on enthusiasm over expectations that Opec+ would address supply and demand concerns by extending production cuts at their upcoming meeting next month. Meanwhile, others argued that a mere extension of current curbs would fail to support the market amid what they see as signs of oversupply.

Price remained volatile posting impressive gains early in the week, crude oil was down about 5 per cent but rallied over 7 per cent over a two-day period to reach their highest levels since mid-September. However, before the weekend, prices tumbled on profit-taking after hitting a two-month high. The market seems to be moving by mixed statements from US and China were the market still remained cautious for the deal to happen later this year or getting dragged till 2020 as per the reports.

Inventories and rigs
• EIA reports a build of 1.4 mbpd compared with 1.1 mbdp forecasted by investors meanwhile, the API reported a 6 mbpd increase in oil stocks.

• EIA showed a supply rise of 1.8 mbpd for gasoline, but distillate stocks fell by 1 mbpd compared with showed expectations for a supply climb of 750,000 bpd for gasoline, while distillates were forecast to fall by 1.4 mbpd.

• The volume of oil stored at Cushing, Okla dropped by 2.3 million barrels to a total of 44.2 mbpd – approximately 58 per cent of capacity.

• Refinery utilisation increased by 0.7 per cent to 87 per cent.

• Oil imports were down 18 per cent YoY.

• US oil production for last week was 12.7 mbpd.

Opec meet
Market saw huge volatility on speculation over the progress the US and China negotiations and market remained broadly optimistic that crude fundamentals will move towards rebalance. There remains two choices for OPEC+ i.e. either meet in December and extend the current cuts until June or defer the decision until early next year, meet before March to see how the market looks and extend the cuts until the middle of the year.

Some sources confirmed that the cartel and its allies are likely to extend output cuts to June when they meet next month. Russian President Vladimir Putin reported that Russia and Opec had a common goal of keeping the oil market balanced and predictable, and Moscow would continue cooperation under a global deal cutting oil supply. Markets are in wait and watch situation and any comments from Opec countries to stabilize the markets is boosting the bulls.

Shale
Shale industry is facing the gloom as banks have begun trimming back the credit lines of America’s shale producers, further undercutting a beleaguered industry that’s been struggling to rebuild investor confidence. There are a bunch of issues for shale players like some have drilled their best locations and are now turning to lower-quality sites. And some have been drilling wells too close together, resulting in a loss of overall performance while for others, in some cases, producers are struggling under debt loads accumulated in earlier, more heady times.

Data from Bakes Hughes showed that US oil rigs fell by another three this week, marking the 12th fall in last 14 weeks, falling by 99 rigs in that timeframe. This has not stopped the US from producing and we saw US production has grown from 11.7 mbpd at the beginning of the year to an all-time high of 12.8 mbpd for the second week in a row.

Natural Gas
December prices moved higher after forecasts now point to a potential cold front that could develop in the US West later this month and push eastward, which would boost heating demand for natural gas. EIA reported a drawdown of 94 BCF marking the first decline of the inventory withdrawal season against an expectation for a draw of about 86 Bcf.

The demand picture still looks positive for natural gas.

• Electric power deliveries were the highest for any month since EIA began using the current definitions for consuming sectors in 2001.

• LNG exports were the highest for the month since EIA began tracking them in 1997.

• Markets reports suggest that national natural gas consumption will increase by 6.42 per cent YoY (on average) over the next three months (November to January).

• In December and January, it is forecasted for an annual supply-demand balance to be in “deficit” relative to 2018-2019: -7.72 bcfd in December and -4.15 bcf/d in January.

Conclusion
Markets are waiting patiently for clarity on two most important factors of trade war and Opec cuts. Right now, nothing has been decided as yet and negotiations tend to heat up closer to meeting time. Prices can positive for coming weeks on account of expectations toward the “Phase One” partial trade agreement.

But we have heard that many times before and without further detail, the market seems to be largely ignoring that. Reports suggest that the process of getting a Phase One trade deal would be full of uncertainty.

Volatility will continue even after a Phase One deal is agreed because the market will then start to question the likelihood of a more comprehensive follow-up agreement. At the end of the week, traders didn’t know if the talks had reached a stalemate over the rollback of tariffs, or whether the US had accepted an invitation from China to resume face-to-face talks in Beijing.

It’s a holiday week in the US so look for light volume. At this point, short-term pullbacks are probably buying opportunities that you can take advantage of. Going back and forth is probably what we are going to continue to see going forward.

(Investors are advised to consult financial advisers before taking an investment calls based on these observations)