Crude oil traded lower but overall it looks as if both WTI and Brent crude oil continue to settle into relative tight ranges around $55/b and $60/b respectively. The global outlook for demand remains challenging with the current weak sentiment not being helped by a recent IMF global growth downgrade and uncertainty surrounding trade negotiations between the U.S. and China. Opec and Russia may, given the current demand outlook, be forced to maintain and potentially cut production even further in 2020. Whether that can be achieved or not is likely to refrain the market, barring any renewed geopolitical event, from rallying anytime soon.
President Putin’s visit to the Middle East region this past week further cemented the increased cooperation between Russia, Saudi Arabia and its allied in the GCC. A development which began in earnest back in early 2017 with the agreement to curb oil production in order to stabilize the price. Russia is also likely to seize the opportunity left open by Donald Trump’s increasingly erratic behaviour when it comes to foreign policy decisions.
Perhaps reducing the need for Opec+ action is the fact that US shale production growth has slowed in 2019 and look set to slow even more over the coming years. Lower crude oil prices and increased scrutiny from investors looking for a return instead of rapid growth have led to an almost continued reduction in the weekly rig count since last November. The XLE ETF which tracks the performance of U.S. crude oil and natural gas producers has underperformed the S&P500 by close to 20% so far this year. An indication of lower investor confidence and one that may hamper future growth through lack of investments.
However back to the current weak sentiment which is being reflected by the attitude towards oil from large speculators. According to weekly data from the U.S. CFTC, hedge funds dumped 87,000 lots (87 million barrels) of WTI and Brent crude oil futures during the week to October 8. The combined net-long dropped to a nine-month low of just 301,000 as the risk premium following the September attacks in Saudi Arabia was removed.
Worst hit was WTI where the long position dropped to their lowest level since 2013. U.S. sanctions against China's COSCO Shipping Energy Transportation Co. prompted a recent spike in the cost of chartering Very Large Crude Carriers (VLCC). Before eventually easing this week, the cost of transporting crude oil from the US Gulf coast to refineries in the far east is likely to have triggered a slowdown in exports and, with that, rising inventories.