Oil Price Concerns Shake Commodities Markets to the Core

The price of WTI crude oil plunged 2% as worries about oversupply rocked global commodity markets

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Nov 18, 2015
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Commodity brokers and fund managers are increasingly pessimistic about crude oil prices over the short to medium term. Money managers with an interest in WTI crude oil increased their short positions by 21% for the week ending Nov. 10. Overall, the net long position for WTI crude oil plunged 16%. This data was supplied by the Commodity Futures Trading Commission (CFTC).

For the better part of 2015, the oil market has been characterized by oversupply and slack demand. OPEC countries and U.S. shale oil producers alike have been jockeying for position in a saturated market. Neither WTI producers nor Brent crude producers are willing to give an inch; both are pushing for market share at the expense of rising prices.02May2017185747.jpg

The Energy Information Administration (EIA) is expecting a downturn in daily demand for crude oil in 2016. This year, demand hit highs of 1.8 million barrels per day, but for next year the forecast is 1.2 million barrels per day. During the month of October, worldwide oil output was 97 million barrels per day, of which approximately 33% came from OPEC. For 2015, it is expected that crude oil output will increase by 0.6 million barrels per day over 2014 figures of 8.7 million barrels per day. However by 2016 crude oil production will once again decrease in tandem with EIA expectations to 8.8 million barrels per day. All of these factors are weighing heavily on the futures market for crude oil, and this is reflected in lower commodity prices.

Surging inventories levels crush crude oil prices

In developed countries, inventories of crude oil grew at a rate of approximately 3 billion barrels due to massive oversupply by OPEC/non-OPEC countries. Price considerations are playing second fiddle to market share, and it is clear that OPEC countries are attempting to squeeze out higher cost producers such as the U.S. by saturating the market with cheap crude oil. By the end of the day on Tuesday, WTI oil futures plunged to $40.67 per barrel (-2.6%) which is the lowest closing figure in three months.

Global weakness fuels negative speculative sentiment for WTI

A big part of the problem is increasing oil inventories as a result of excess supply and not enough demand even at these historically low prices. The EIA reported that WTI crude oil supplies increased by 487 million barrels by Nov. 6. That figure is the highest increase in inventories for November in 85 years. In terms of short positions and long positions on crude oil, speculators were increasingly bearish on the prospects for this commodity as is evident by precipitous declines in long contracts to 144,854. Short contracts increased by 23,766. Speculative sentiment is clearly bearish, as evidenced by sharply declining prices on crude oil as a result of U.S. dollar strength, China weakness, excess supply and weak global demand.

Brent crude oil now has a premium over WTI crude oil of just under $2 per barrel. Barely two weeks ago the premium was approximately $4 per barrel. As the spread between the two diminishes, more oil is being used up in the U.S. as the price differences are minimal. At the start of the week, there was a spike in the price of crude oil following the terrorist attacks in France and the French bombing campaign against ISIS targets in the Middle East. However, calm has since returned to the markets and oversupply of crude oil is now continuing. In and of itself, Syria is not a highly regarded producer of crude oil and the trend has resurfaced – oversupply shall continue. As the U.S. inexorably moves toward a rate hike on Dec. 15-16, we can expect a stronger U.S. dollar to encourage even more oil producers in the markets even though commodity prices are declining. The short-term increase in oil producers will invariably lead to a large spread between supply and demand which will result in contractions as demand fails to clear the markets.