HomeResearch and NewsOil Market Report - November 2017
Vitaly Gromadin CFA, Senior Analyst

Oil Market Report - November 2017


Crude oil market in November had been trading in anticipation of successful Nov-30 OPEC/non-OPEC meeting. It went as anticipated and the price reacted quite well given already overloading situation with long positions in crude oil futures. Some correction in price would be definitely understandable because significant downside risks are still in place.   

There is a record bullish position in crude oil and oil products futures. Hedge fund managers have cut short positions in U.S. benchmark WTI futures to 40 mln bbls, the lowest level since February 2017. Hedge funds hold almost 8.5 long positions in the crude and fuels futures and options contracts for every short position, the second-highest ratio on record, according to Reuters.  The only time that the ratio was more stretched was earlier this year on Feb. 21, and that preceded a sharp sell-off in crude prices in March.

Portfolio managers are apparently positioned for market rebalancing in late 2018 and aimed to crude oil price in the region of $70-90 per bbl. It is also expected to be the time of highly anticipated Saudi Aramco’s IPO. Some slowdown in U.S. shale oil production pace of growth and underinvestment in oil industry are factors behind this possible $90 per bbl target.

The key downside risk as usual is negative surprises from U.S. oil output. Drilling activity has been on the high level lately, according to DrillingInfo.  The market has mostly ignored weekly production estimates from EIA, which has surpassed the level 9.6 mln bbl / d. Monthly EIA’s data with two months lag had showed much lower numbers for U.S. output (1-3% lower or 100-300 thsd bbl / d difference) before for September EIA surprisingly announced production volumes close to 9.5 mln bbl / d, higher than average weekly estimates this month by 131 thsd bbl or +1.4%.

Market’s sentiment this year has been extremely bipolar in nature:

  1. Saudi Arabia and its allies will bring the market to balance and growth in other non-OPEC oil production will be much lower than growth in world oil demand.

  2. Export countries included in the cut deal are cheating through higher export volumes of crude oil or oil products. Additionally, Nigeria and Libya production recovery is significantly weakening the effect from the cut and above average growth in demand is risky. U.S. shale producers will not slow their pace of activity.  

Last three months was certainly the first one, bullish pole. Market’s sentiment is likely to change soon. In this case the price could suddenly lose its ground.   

OPEC last oil report was strongly positive:

  • Global oil demand is expected to rise 1.51 mln bbl / d next year (previous forecast was 1.38 mln bbl / d).

  • Forecast for non-OPEC oil supply growth in 2018 was cut by 70 thsd bbl / d to 870 thsd bbl / d. 

  • As result estimate for demand for its crude in 2018 was raised by 360 thsd bbl / d.

  • The only possible negative moment in the report that Saudi Arabia told OPEC that it had pumped above 10 mln bbl / d in October, 83 thsd bbl / d higher than in the previous month.

IEA announced likely more realistic assumptions:

  • Oil "market balance in 2018 does not look as tight as some would like and there is not in fact a ‘new normal’ for crude oil prices.

  • Oil demand growth forecasts was cut by 100 thsd bbl / d for both 2017 and 2018 to +1.5 mln bbl / d and + 1.3 mln bbl / d respectively.

  • Warmer weather, rising non-OPEC output threaten oil market balance, a build in first half of 2018 is likely. Balances are likely to show oversupplied crude oil markets In Q4 2017, Q1 and Q2 2018. IEA sees return to oil oversupply by mid-2018 even with OPEC deal extension.

  • Non-OPEC supplies increased by 205 thsd bbl / d m-o-m in October to 58.05 mln bbl / d, 225 thsd bbl / d higher comparing on the year over year basis.

  • Non-OPEC oil supply is expected to rise by 700 thsd bbl / d in 2017 to 58.1 mln bbl / d and 1.4 mln bbl / d next year to 59.5 mln bbl / d, led by US output.

  • In next 10 year more than 80% of oil output growth is expected to come from U.S.

EIA in its Short-Term Outlook expected the oil market undersupplied by 0.17 mln bbl /d in 2017 (-0.32 mln bbl / d previously), oversupplied by 0.29 mln bbl / d in 2018 (0.18 mln bbl / d previously).

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