OPEC+ to set the tone as oil consolidates strong gains

Having seen Brent crude oil rally to a 13-month high above $65/b and WTI stretch above $60/b and beyond levels that could trigger a production response from U.S. shale oil producers, OPEC+ is likely to focus on price consolidation and decide on a production increase close to the agreed maximum of 1.5 million barrels/day. This in order to ensure that the newfound focus from US shale oil producers to preserve cash and look after shareholders doesn’t get tempted to return their focus on higher production. How smooth the meeting will turn out hinges on whether Saudi Arabia wants to reinstate the 1 million barrels/day and if not, how the total increase should be shared out among the members.

Brent crude has bounced after finding support at $62, the February 19 low, and before challenging the uptrend from the November consolidation low, currently at $61.20. Using Fibonacci as a guide, Brent could drop all the way to $59.60 and it would still only be categorized as a correction, not a reversal. 

The negative impact on general risk appetite during last week’s bond yield spike became visible in the latest Commitments of Traders report covering the week to Tuesday, February 23. Despite seeing strong Texas-freeze gains across oil and products, speculators instead chose to book some profit into the rally. In addition to reduced risk appetite it may also signal a growing hesitancy in chasing the market higher at this stage where supply cuts instead of rapid rising demand has been the main driver behind the +60% rally since early November, when vaccine announcements and the Biden win helped trigger renewed demand from investors both looking for a recovery but also seeking shelter against the risk of rising inflation.

The combined net long in WTI and Brent crude oil futures held steady at 736,000 lots, the biggest bet on rising oil prices since October 2018, but still some 350,000 lots below the March 2018 record.

It’s Wednesday which means it is time for the Weekly Petroleum Status Report from the US Energy Information Administration at 15:30 GMT. A report which that will show the massive amount of disruption from the recent cold blast in Texas, as it cut crude oil production, but also demand as refineries were forced to temporarily shut down. With this in mind and looking at last nights report from the American Petroleum Institute the market will be looking for a spike in crude oil stocks and a big drop in product stocks.

As per usual I will publish results and charts on my Twitter handle @ole_s_hansen.