20 Mar 2017

The IEA report by increase in OPEC production of 170k b/d

After the dramatic move lower in recent weeks, it might be supposed that speculative long positions are now dramatically lower.

The latest data from exchanges publish on Friday and showing positions on US crude as of last Tuesday (there is a longer delay in publishing Brent data), suggested that while investor long positions have reduced, they remain high. What has changed is that speculative short positions have increased substantially. This suggests that oil is still prone to downside if further technical levels are broken.

The IEA's February report was published last week (click here). Saudi Arabia’s admission last week that February production had increased over January manifested itself in the IEA report by increase in OPEC production of 170k b/d. Meanwhile the IEA estimates that non-OPEC signatories to cuts have so far cut by only 37% of their commitment. Overall the IEA observed that the overproduction of OPEC members at the end of last year ahead of the cuts is taking its time to work through the system. The fall in total OECD inventories, that had been underway since last summer, went into reverse in January, albeit only modestly. It sees the call on OPEC at 32.3m b/d over the first quarter of this year, implying a deficit of only 300k b/d (click here for supply/demand chart).

Having made such a fanfare about cutting by more than its quota in January in order to set an example to others, the actions of the Saudi Arabia seem quite extraordinary and one market reacted badly to the news. Brent fell to a key trend-line support formed from the low of January last year at 50.25 $/b. It also made a tentative break through the 200-day average. This is the fourth time in the last 12months that the 200-day average has supported Brent. The situation is similar for US crude.

The market recovered a little in the remainder of last week as the US inventories showed their first weekly increase this year, albeit by only 200k barrels. More significantly, imports have continued to fall which may suggest that the effect of the OPEC surge from the end of last year is starting to abate. We can also expect to see refinery activity start to increase again in the coming weeks.

For more information, please see this pdf.