Oil markets ignore impending production cuts by 3 OPEC+ members

Oil prices rose in the intraday session on Wednesday, with Brent crude for November delivery rose 2.12% to trade at $70.66 a barrel at 2:46 PM ET, while WTI crude for October delivery gained 2.39% to change hands at 67 .32 USD/barrel.

The reversal The selloff in oil prices came amid several shutdowns by oil and gas operators in the Gulf of Mexico, with Hurricane Francine expected to make landfall along the Louisiana coast Wednesday afternoon or evening. According to the Bureau of Safety and Environmental Enforcement (BSEE), energy companies have shut down nearly 40 percent of oil production and nearly 50 percent of gas production in the Gulf of Mexico as the storm approaches.

However, it is doubtful whether the shutdowns in the Gulf of Mexico will generate enough momentum to completely reverse the oil price selloff of the month. After all, hedge funds and other money managers have turned the most bearish on crude oil since the CFTC began publish information on market positioning, with speculative crude currently extremely short. Brent and WTI net long totaled just 139,242 lots in the week ended September 3; net speculative longs on the four Brent and WTI contracts recorded just 2.3% of open interest, the lowest level since early 2011 and 2 percentage points below the pandemic-era low. Net sales over the past week were 108.8 million barrels (mb), bringing cumulative net sales over the past eight weeks to 311.2 mb. Meanwhile, commodity analysts at Standard Chartered reported that the bank’s proprietary crude oil positioning index fell to -100.0 for the first time this year.

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According to commodities experts at Standard Chartered, there has so far been little to deter trend-followers from increasing the size of their short positions, with Brent touching lower in 14 of the past 20 trading days , and intraday highs were lower. in 16 of those 20 days, including all of the last eight. StanChart says the current extreme in positioning is based on incorrect expectations of a looming crude glut, along with weakened economies in China, the US and Europe. More importantly, traders are overlooking the imminent removal of even more barrels from the markets in the coming months.

In July, Russia, Iraq and Kazakhstan submitted their compensation plans to the OPEC Secretariat for overproduced crude volumes in the first six months of 2024. According to OPEC, all overproduced volumes will be fully compensated over the next 15 months until September 2025, with Russia “paying back” a cumulative amount of 480 kb. /d, Iraq 1,184 kb/d and Kazakhstan 620 kb/d. According to StanChart, offsetting production cuts by the three OPEC members amount to a combined cut of 370 kb/d in October and then an amount ranging between 162 kb/d and 206 kb/d for November 2024 to September 2025. StanChart determined that the addition of the compensation program to the recently announced reduction in targets due to the delay in the implementation of the phase-down will lead to a drop in OPEC production by 530 kb/d in Q4-2024; 540 kb/day lower in Q1 and Q2-2025 and 560 kb/day lower in Q3-2025, if all commitments are met. StanChart argued that the current market assumption that there will be no offset cut is wrong because other OPEC+ countries are highly unlikely to take it lightly. StanChart says Saudi Arabia in particular is unlikely to accept any further backtracking on promises made by overproducers, noting that high-profile visits to Iraq and Kazakhstan by OPEC Secretary General Haitham al Ghais suggest OPEC plans to continue cuts promised.

“We have received strong assurances that Iraq remains fully committed to the DoC’s ongoing market stabilization efforts. During this visit, Iraq presented clear and decisive steps to offset the overproduced volumes and gave assurances that it will achieve full compliance in the future, ” al Ghais said after visiting Baghdad.

On the near-term outlook for oil prices, Standard Chartered’s proprietary machine learning tool SCORPIO predicted a $3.02/bbl rise in Brent dated for the week ending September 16. StanChart notes that while it will take time for oil markets to start paying attention. on real fundamentals, positioning has become extreme enough to skew price risks to the upside.

By Alex Kimani for Oilprice.com

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