OPEC Compliance Remains Primary Concern for WTI
WTI futures opened the year by dropping 2.4% to $52.33 per barrel as the U.S. dollar reached its highest level since 2002. Brent contracts also fell to settle at $55.47.
The drop followed a busy morning where both contracts opened at their highest levels since July 2015 on optimism that OPEC and other big oil exporters would cut production and drain the global supply glut.
Source: Bloomberg L.P.
The production cuts announced by OPEC and non-OPEC producers in November and December are expected to take 1.8 MMBOPD, or 2% of total world supply, off the market if fully implemented. Reports that Kuwait and Oman had cut production by a combined 175,000 BOPD provided a positive signal to markets.
Russian production in December was estimated to be at a thirty-year high of 11.2 MMBOPD, according to its Energy Ministry. The country has committed to removing 300,000 BOPD from the market in the first half of 2017. Libya, exempt from OPEC’s cuts, increased its production last month as well.
EIA reported that U.S. domestic production also increased month over month by 232,000 BOPD in October, with the Lower 48, Gulf of Mexico, and Alaskan regions all increasing their output.
Investor Focus Shifts Back Towards Dollar
A strengthening dollar reduced investor demand for commodities priced in U.S. dollars. The dollar rose on stronger than expected November manufacturing data.
“Recently, oil and the rest of the energy space has largely ignored the relentless uptrend in the dollar which generally pressures the broader commodity space,” said Tyler Richey, co-editor of The 7:00’s Report. “But as we are starting a new year it appears that some traders are adjusting their outlooks and are becoming less optimistic about an oil rally in the face of further dollar strength.”
Natural Gas Plunges on Warmer Weather Forecasts
Natural gas futures fell on Tuesday as weather forecasts for an early January Arctic blast were tapered. Natural gas for February delivery fell by $0.32 or 8.54% to end at $3.41 per MMBTU.
Source: Bloomberg L.P.
Lower production combined with higher heating and power demand and below-average inventory levels mean gas will likely shoot up again if cold weather forecasts return.
