The oil price slide that prompted several weeks of oil contract selling among hedge funds could be coming to a close, according to the latest data on hedge fund oil buying and selling, as reported by Reuters’ John Kemp. News from the oil industry has also helped spark some optimism. Unfortunately, chances are this would only be temporary as the outlook for oil remains rather pessimistic.
Sales of the six most popular oil contracts slowed down to 11 million barrels of oil equivalent during the last week of February, Kemp reported, noting that this was before another wave of concern about the spread of the Chinese coronavirus rattled the oil market.
This week could see more sales, but the trend could be coming to an end as funds are now at their most bearish on oil in about three years. According to Kemp, this means “the balance of risks has shifted to the upside, with the prospect of further long liquidation or short sales diminishing and greater opportunity for fresh long building and short covering.”
Meanwhile, as the coronavirus scare grows with more diagnosed cases—and more deaths—reported outside China, OPEC has stepped up its efforts to put an end to the price slide that last week sent Brent briefly below $50 a barrel. Reports from Monday had it that the cartel was considering production cuts even deeper than the 600,000 bpd that was proposed in February. Now, according to unnamed sources who spoke to Reuters, OPEC is discussing additional cuts of 1 million bpd, which would put the total at 2.7 million bpd.
This is a sizeable portion of the global supply, but it remains uncertain whether it will be big enough to arrest the price slump. Prices jumped on the news yesterday, with both Brent and WTI adding more than 2 percent in late-morning Asian trade today, but this rise is fragile. Any bad news about economic activity in China would pressure the benchmarks yet again regardless of what OPEC agrees at this week’s meeting in Vienna.
As before, Russia remains the key factor. The world’s second-largest producer has followed the same pattern of initial reluctance followed by eventual agreement in its recent history as a partner of OPEC, but this time there is fear it might have had enough of the cuts, especially given the opposition of Russian oil companies to any cuts at all.
Yesterday, President Putin hinted that Russia may once again end up agreeing to play ball, which would have a more solid effect on prices than if OPEC decided to go it alone and slash 1 million bpd of production without Russia’s participation. At a meeting with industry executives, Putin noted that the partnership with OPEC had “proved to be an effective instrument to ensure long-term stability on global energy markets.”
Yet at the same time, he said Russia was comfortable with current price levels.
“Our accumulated reserves, including the National Wealth Fund, are enough for ensuring a stable situation, the fulfilment of all budget and social liabilities, even under a possible deterioration of the global economic situation,” Putin said.
Russia’s budget for this year is based on an oil price of $42.40 per barrel. This compares with $83 for Saudi Arabia. That’s quite a gap in acceptable oil prices but it is not out of the question that oil could fall below Russia’s comfort level, too.
Bloomberg’s oil strategist Julian Lee wrote earlier this week that oil could fall as low as $30 a barrel and the reason for this will be demand for oil, already hurt severely by the coronavirus outbreak that prompted flight cancellations and other travel restrictions that affected fuel demand.
Many believe demand will improve later this year but, again, this is far from certain. As Bloomberg’s Lee puts it, “The flights that have been cancelled are gone, not postponed. The road trips not made this week won’t be made up in future weeks. Traffic may return to normal levels once the virus is brought under control, but there won’t be a surge beyond that from pent-up demand.”
By Irina Slav for Oilprice.com
