Oil bulls capitulate against a wall of supply

Ole Hansen

Head of Commodity Strategy, Saxo Bank Group

Summary:  Crude prices capitulated Tuesday as Opec's Monthly Oil Market Report confirmed that rising production from non-Opec producers has slashed demand for Opec’s oil against a backdrop of demand growth fears into 2019.


The rout in crude oil accelerated yesterday when Opec's Monthly Oil Market Report confirmed what bulls increasingly had come to fear. Surging production from non-Opec producers, especially the US and Russia, and reduced demand for Opec’s own oil at a time when the market was already troubled by signs of slowing demand growth into 2019. Adding to this, we have the reduced impact of US sanctions against Iran’s export ability after Washington unexpectedly granted waivers for some countries, including some of the world’s biggest buyers. 

The 7% drop in WTI crude oil and 6.6% drop in Brent were the worst one-day losses for these benchmarks in three years. It looked like a classic capitulation move with bulls finally throwing in the towel following weeks of relentless selling. It now raises the question of whether the market has overshot to the downside, just like Brent did to the upside at the beginning of October when it hit $87/barrel. 

The International Energy Agency's November Oil Market Report released earlier today confirmed the ongoing trend of rising non-Opec production while demand growth was kept close to unchanged as a weaker economic outlook into 2019 was being offset by lower oil prices. To this, the IEA said "oil demand is slowing in several non-OECD countries, as the impact of higher year-on-year prices is amplified by currency devaluations and slowing economic activity". On supply, the report stated said "global oil supplies are growing rapidly, as record output from Saudi Arabia, Russia and the US more than offsets declines from Iran and Venezuela. October output was up 2.6 million barrels/day on a year ago. Non-Opec output will grow by 2.4 mb/d this year and 1.9 mb/d in 2019".

The below charts combined the monthly data from Opec, IEA, and the EIA. They show the clear trend of rising non-Opec supply hitting a market where demand growth is stable to lower. The 2019 balance continues to show a rising surplus and this has led the IEA to forecast an implied stock build of 2 mb/d in the first half of next year, all things being equal (i.e. that we do not see unexpected supply disruptions from produces such as Libya, Nigeria and Iraq).
Crude oil has found a bid after the IEA report highlighted the potential positive demand impact of the recent price slump and news reported by Reuters that Opec and its partners are considering a supply cut of up to 1.4 mb/d. 

Several oil producers can ill afford the 25% slump witnessed since early October and on that basis we can expect both Opec and Russia to step up their attempts to stop the rout and guide crude oil higher towards their preferred comfort zone between $70/b and $80/b. 
From friend to foe…

For these efforts to be successful, Opec and its partners need to see hedge funds playing a supporting role and returning to the market on the buy side. Following six weeks of selling up until November 6, funds held a combined net-long in Brent and WTI of 420,000 lots, a 16-month low and well below the record 1.1 million lots seen back in March.

The position impact of yesterday’s sharp sell-off will not be known until this Friday after the close when the CFTC releases its next COT report covering the week to November 13.
Please note that the weekly stock report from the EIA is delayed until Thursday, November 15, at 16:00 GMT.

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