Scraping the Barrel
Oil is trading lower but very rangy into Asia open despite OPEC extending Q2 production cuts and addressing non-compliance. There was always a good chance we’d see profit-taking after the strong run into the meeting, especially with news of the start-up in Libya's el-Shahara field after the most recent ceasefire.
There might be some disappointment that the cut extension came in at the bottom end of the 1-3 month range that had been speculated on in the press. Even the critical takeaway that the group has sought to address (under-compliance, especially as it pertains to backdated compensation) has been flagged as smoke and mirrors by some analysts. At the same time, over-compliance from Saudi Arabia and other GCC producers is not expected to continue.
Traders are back to the task at hand, which is effectively poring over data. And, truth be told, everything’s not coming up roses. While crude stocks declined from their recent peak, they’ve been trending flat for the past month (and >10% above average). However, large builds in product stocks continued with gasoline 10 % above the 5-year average. With the demand rebound stalling it feels like more of a flip of the coin for prices at this stage, heading into this week's US inventory data reports.
US production complicates the rebalancing issue as traders have clearly been getting jittery and continue to book profits around WTI $40/b; unquestionably there’s some concern about the supply response from US shale producers. So far the US rig count continues to trend down, which remains supportive of the rebalancing of supply and demand underway.
Oil bulls remain optimistic that the March gap lower will be filled over the summer. But OPEC trust will need to be verified and macro dominos will need to fall in place. With the next OPEC+ meeting scheduled for 1 December in Vienna, monthly JMMC meetings will monitor market developments and OPEC+ compliance behavior, which has helped with the price rebound. Full recovery to early March levels will need continued supply discipline, demand recovery and time to work off inventories and spare capacity. That’s a tall order that could be prone to less satisfactory results over the short term.
Oil trading is never easy at the best of times and it’s even more challenging holding one's bullish resolve as oil prices remain overly sensitive to news flows.
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Investors take a glass half full approach while looking out six months and running on monetary and fiscal fumes.