Oil price stuck in neutral as global forces push and pull

Oil prices remain mired in a $50-$55 per barrel range for a number of reasons. The oil market is cautiously optimistic about the OPEC/non-OPEC country supply cuts’ ability to accelerate a market rebalance, but remain wary of how swiftly U.S. shale supply might respond.

The estimates for U.S. shale supply growth in 2017 have been consistently revised higher for the past several months and that has the bulls concerned.

Another reason for the recent lackluster action in oil prices is that the market priced in the impact of the OPEC/non-OPEC supply cuts in a very short amount of time.  Oil prices jumped from the mid-$40’s to the mid-$50’s within two weeks after the OPEC deal was announced in late 2016.

{mosads}Now we have to wait for the fundamentals to catch up, which, in the physical world, takes a bit of time (several months). Case in point, U.S. crude inventories are at all-time highs. 

Finally, and somewhat correlated to that last point, is that, ultimately, fundamental data and expectations may sway opinions, but money is what moves markets. There is a decent amount of transparency provided to show how money is moving the oil market via the Commitment of Traders (COT) reports.  

These reports break out the positioning of the largest trader groups into their respective categories, which essentially separates the commercial participants (physical traders and hedgers) from the non-commercial participants (“speculators”). 

The number of net long oil contracts held by “speculators” has roughly doubled since November 2016 and currently sits at near-record highs.

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There have been two catalysts spurring this buying activity. First, the OPEC/non-OPEC deal to cut supply in order to accelerate rebalancing of the market has been successful. Countries have adhered fairly strictly to the agreement thus far. 

Second, the Trump presidential victory ushered in renewed hopes of fiscal stimulus, be it in the form of tax cuts, infrastructure spending, or both. These policies are viewed as inflationary, and investors took to commodities as a hedge for their portfolio should those policies play out.

As a result, positioning from the non-commercial group of traders is very stretched from a historical perspective, and it is becoming increasingly difficult to find a marginal buyer of oil derivatives.  As the fundamentals improve, however, and inventories begin to draw down, physical traders will step in to remove storage hedges, providing fresh buying, but this will largely offset only some of the liquidation that will likely occur from the speculative side.

All in all, there are quite a few contradictory pieces at play that are contributing to this narrow trading range in oil prices of late. It is unlikely that this represents a “new normal” for oil prices because, by almost all estimates, global oil supply will not grow enough at $50 per barrel to offset natural declines from producing fields as well as satisfy growing oil demand globally. 

Barring an economic slowdown, most analysts predict demand growth will remain fairly robust for the next decade or two. If one agrees with those expectations, it implies oil prices will eventually need to be higher in order to incentivize investment in new production projects. 

However, from a pure positioning perspective, oil prices will likely struggle to move substantially higher in the near term and will have to wait for the fundamentals (significant drawdown of oil inventories) to take hold first.

Anthony Starkey is manager of Energy Analysis at Platts Analytics, a forecasting and analytics unit of S&P Global Platts.

The views expressed by contributors are their own and not the views of The Hill.