Continued stock builds and concern about OPEC members cranking up production may have put a cap $50

Oil prices took a dramatic dip Wednesday following the crude oil inventory report, which showed an 8.2 MMBO increase in U.S. storage compared to an expected 2.0 MMBO build.

After enjoying prices in the $54 per barrel level during EnerCom Dallas last week, WTI found itself below $49 Thursday morning. Adding to the downward pressure on oil prices, OPEC and non-OPEC members have been non-committal in regards to whether or not they will extend their crude oil production cut agreement.

Saudi Arabia will only accept limited intervention by OPEC in oil markets, Khalid al-Falih, the Saudi minister of energy, industry and mineral resources and chairman of Saudi Aramco said Tuesday. The kingdom will maintain its policy of managing production only for “a restricted period of time,” such as to alleviate the impacts of financial crisis, economic recession or a temporary inventory glut, Falih said, indicating it was too early to say if OPEC and cooperators outside the group would extend their production cut agreement.

Both international and U.S. crude oil benchmarks fell over 5% Wednesday, closing at $53.11 and $50.28, respectively. For WTI, the level represented its biggest one-day fall since February 2016 when prices reached the bottom of the trough at $26.21 per barrel and was the lowest closing price since early December.

Crude oil inventories for the week ended Mar. 3, 2017. The larger than expected build sent oil prices downward

“Compliance within OPEC is less than 50% if you exclude Kuwait and Saudi Arabia who cannot shoulder the whole burden over the long-term,” Eugen Weinberg, head of commodities research at Commerzbank, said to CNBC.

Adding to the problem, exports have not softened despite the cuts in production, meaning markets are staying oversupplied for the time being.

“The export numbers are at the same level as last December which demonstrates that the oil production cut is having little effect on market levels,” added Weinberg. “The market is looking for a price recovery from here but as there is still not enough of a cut to send supply into deficit, I think $50 per barrel is more likely to be a ceiling than a floor with prices potentially slipping down to $40 this year.”

Speculators getting out of long positions

On the technical trading side, the price slide could signal more downward movement yet to come. Speculators are beginning to unwind long positions in crude oil, which were close to a record, Reuters reported. More selling could be triggered if prices close below the psychologically important level of $50 per barrel.

“We’re seeing some ‘GMO trading’, or ‘Get-Me-Out’ type trading,” said Andrew Lebow, senior partner at Commodity Research Group. “It’s a combination of an overhang of (speculative) length and the overhang in inventories … and the other thing unnerving the market is rapid growth in U.S. crude production.”

Both Brent and WTI forward contracts fell below their 100-day moving averages for the first time since late November when OPEC and non-OPEC producers including Russia announced plans to scale back supply in support of crude oil prices.

Adding to pressure on oil prices are expectations that the Federal Reserve will increase its key rate next week. The rate hike will lead to a stronger dollar compared to other currencies, increasing the cost of oil-denominated commodities like crude oil.

“Currently, many OPEC fields are in the middle of maintenance, helping depress production (in fact, the Abu Dhabi National Oil Company has notified its customers to expect cuts because of its maintenance). Whether the high rates of compliance with OPEC production cuts, estimated by the cartel as 140 percent of the agreed amount for among OPEC members in February, continue when the maintenance cycles are complete is a bit of a wild card in looking at future supply. The question of whether another production cut agreement can be forged is another,” Stratfor reported today.

“Saudi Energy Minister Khalid al-Falih has said global crude inventories have not fallen as much as he would like, hinting that Saudi Arabia might be open to extending the production cut deal when the topic comes up in May. Increased production in Libya and Nigeria, which are exempt from the OPEC deal, has added to the global supply. But Libya’s production of about 650,000 bpd could take a hit if Khalifa Hifter, field marshal of the Libyan National Army, tries to retake the As Sidra and Ras Lanuf oil terminals. Those were wrested from his army’s control on March 3 by fighters from the Benghazi Defense Brigades, a jihadist-linked militia. Fighting could damage the terminals, leading to a longer-term reduction in the country’s output,” the report said.

 

Analyst Commentary

From Capital One:

Macro Energy Thoughts
With yet another significant increase in US inventories, crude prices have taken a huge hit over the last 24 hours. WTI is -779 bps and Brent is -697 bps since the close on Tuesday after the EIA reported yesterday that US inventories rose last week by 8.2MM bbls. That build makes the 3rd weekly build this year of at least 8MM bbls. The increases are coming at the same time that the US oil rig count is also seeing strong increases. Worries about both current excess supply and the coming additional supply that will result from new rigs going to work have WTI below $50 for the first time this year. WTI is currently -241 bps at $49.09 and Brent is -207 bps at $52.02.  


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