Further OPEC Cuts Under Discussion
The CFTC COT report showed that Net longs in WTI crude have fallen to 4-week lows. Net longs fell by -34,843 contracts last week as bulls reduced positions for a third consecutive week. The recent downturn in global manufacturing has heightened concerns around the health of the global economy, putting further downward pressure on the global demand outlook for oil .
Reuters has reported that Nigeria this week has agreed a higher output allocation with OPEC under an agreement aimed at curbing oil supply. Nigeria has been pushing for a higher output target to accommodate the increasing size of its oil industry. As of the last OPEC meeting, Nigeria’s oil output target was 1.685 million. However, as of this week, the country’s target has now been increased to 1.774 million barrels per day. As such, Nigeria will achieve a better compliance rate with the current OPEC supply cut initiative given that Nigeria has recently been supplying far above the agreed target. According to the International Energy Agency, Nigeria was over-running its OPEC target by 400%.
OPEC currently has agreed supply cuts between its 14 members and a group of non-OPEC allies led by Russia of 1.2 million barrels per day. At its last meeting in June, the group announced that it would be extending the current supply cuts from July to the end of Q1 2020. However, the group has since met again and discussed the potential for further cuts which the market is expecting to be announced at the group’s next meeting in December.
Ongoing US – Sino trade negotiations pose risks to both sides of the market currently. The breakdown in negotiations earlier in the year has been a major headwind for oil. Unless the two sides are able to come to a deal, the continuing damage to the US economy is likely to keep oil prices pressured, fostering the need for further OPEC supply cuts. However, if the US and China can agree on even an interim deal, this could start to repair the global demand outlook for crude. As such, the trade meetings this week will be closely watched by the market.
US Oil Inventories Rise Further
Earlier in the week the market received the latest Short-Term Energy Outlook which projected a further increase in US crude production over this year and next. The EIA has now steadily increased its domestic production forecasts over the year, highlighting a market heading towards oversupply.
In terms of weekly inventories data, The latest EIA report covering US crude levels last week has increased concerns over the demand outlook for oil. The EIA revealed a fourth-consecutive weekly build in crude inventories, which rose by 2.9 million barrels last week. This increase was accompanied by a further jump in US crude production which rose to new record highs of 12. 6 million bpd. US crude production has surged over the year, creating a frustrating environment for OPEC which is attempting to boost crude prices through ongoing production cuts.
Technical & Trade Views
WTI Crude (Bearish below $55, targeting $45)
WTI From a technical and trade perspective. Picture remains the same in crude with longer term VWAP signalling further downside. The monthly S1 at $50, in line with previous swing lows, might see some initial bids, however, I will be monitoring any retest of the early pivot at $55 to position for a break lower towards $45.
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Patrick has been involved in the financial markets for well over a decade as a self-educated professional trader and money manager. Flitting between the roles of market commentator, analyst and mentor, Patrick has improved the technical skills and psychological stance of literally hundreds of traders – coaching them to become savvy market operators!