After the oil washout

Daily Energy Market Analysis

Crude oil prices are gaining ground after hedge funds capitulated and Russia says they favor extending production cuts. Hedge funds cut their net-long position by 7%, while shorts jumped by 37%. The funds that were long and survived the market collapse are now chasing the market lower. That might not be the best plan as oil inventories in the United States are set to fall again. Now, with the French election behind us and after the oil purge we may want to focus on the fact that the global market is well on its way to tightening.

The Saudi Oil Minister is saying that the OPEC cut will be extended into next year. Khalide Al-Falih said at the Asia Oil and Gas Conference in Kuala Lumpur. He said he’s confident the global oil market will soon rebalance and return to a “healthy state.” Bloomberg reported that Russia is on board. "We are discussing several scenarios and believe extension for a longer period will help speed up market rebalancing” the Russian Energy Ministry said in a statement Monday. “Russia expresses its full solidarity with the efforts of our partners aimed at rebalancing the global oil market and believes that joint efforts to date have been very effective.” So, the two players that matter say that a deal is in the works so it is likely that it will happen.

Yet will it balance the market? The answer is yes. High U.S. production will be offset by OPEC cuts and we will start to see a decline in inventories. This week U.S. crude supply should fall by three million barrels and that is just the start. 

Reuters reports, “producer countries that pumped a lot of their own oil into storage at home have recently been exporting from those tanks to consumer countries such as the United States. OPEC members typically do not disclose their stock levels. So even though the export of stored oil is part of the effort to draw down global inventories, it also has pushed previously invisible inventories into global storage data. Those OPEC shipments may now be easing. Thomson Reuters shipping data shows crude exports from the group dropped from March to April by about 50 million barrels to 741.2 million barrels.

We keep hearing about shale oil production but offshore production in the Gulf of Mexico hit a record, bringing total U.S. output to 9.3 million barrels a day, its highest since August 2015 according to Reuters. Yet we are hitting limitations on US output without major investment and that should start the prices of drawing down supply. Of course, after the market washout the trade is going to be nervous which might be a good thing because we saw what happened when they got over confident.

About the Author

Senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor.