The Oil Futures Market - June 2017

Source: OPEC 7/6/2017, Location: Europe

Oil futures on both sides of the Atlantic tumbled more than 4.5% m-o-m to their lowest value since November 2016. This was due to plentiful supplies, especially in the US where output continued its upward trend, and despite the OPEC and non-OPEC production adjustments. Eight consecutive weeks of crude oil inventory draws, albeit at a slow pace, also failed to support oil futures. There was also a sign of slowing energy demand in China, the world's second largest oil consumer, with a recent survey showing April growth in the country’s services sector at its slowest in almost a year.

Although oil prices rebounded from five-month lows in mid-month, following positive US jobs data and assurances by Saudi Arabia that Russia is ready to join OPEC in extending production adjustments to reduce a persistent supply glut, the market remained in technically oversold territory with futures trading down as much as 19% from highs in mid-April. This prompted some money managers to exit their long positions. Oil futures also fell following the 25 May decision by OPEC and non-OPEC producers to extend production adjustments for nine more months to end of March 2018. Oil prices tumbled sharply despite the extension of the output adjustments. While OPEC's move had been expected, some oil market investors had hoped producers might agree to deeper adjustments. The decision was greeted by a sell-off, with 25 May daily WTI volumes of 1.1 million contracts the highest since the 30 November 2016 session, when OPEC first announced its production adjustments.

Pressure mounted as countries that are not part of OPEC and non-OPEC’s production adjustments increased output. For example, US crude output continued on its 2017 upward trend, with March production increasing by 62 tb/d to about 9.1 mb/d, according to US Energy Information Administration (EIA) data. Rising output from Nigeria, Libya and the North Sea kept the Atlantic basin well supplied with light sweet crude, weighing on crude values. Nigerian crude production rose to 1.68 mb/d, the highest level in more than one year. This followed the restart of Forcados loadings for the first time since October 2016.

ICE Brent ended May $2.42 lower, a decrease of 4.5%, to stand at $51.40/b on a monthly average basis, while NYMEX WTI slipped $2.58, or 5.0%, to $48.54/b. Y-t-d, ICE Brent is $14.38, or 36.5% higher at $53.78/b, while NYMEX WTI swelled $13.13, or 34.7%, to stand at $50.97/b.

On 12 June, ICE Brent stood at $48.29/b and NYMEX WTI at $46.08/b.

In the period ending 30 May, managed money activities decreased their bets on higher oil prices by about 19% in NYMEX WTI futures and options and 2% for ICE Brent, relative to the end of the previous month. Speculative net length in NYMEX WTI declined 49,318 contracts from its level on 25 April, to 206,103 contracts in the week to 30 May. Similarly, in ICE Brent futures and options, speculators lowered net long positions by 8,386 contracts, or 2%, to 349,880 lots. The total futures and options in open interest volume for the two exchanges was down 1% to 5.69 million contracts, and the share of net length positions decreased to 9.8% from 10.7%.

Hedge fund managers had already closed out many of their bearish short positions in crude oil before the OPEC and non-OPEC meeting on 25 May, according to data from regulators and exchanges. The spell of short-covering explains why oil prices rose consistently in the run up to the meeting then sold off sharply afterwards. Money managers raised their net long positions in the main Brent and WTI futures and options contracts by the equivalent of 89 mb in the week to 23 May. The net long position increased for a second week running, after rising 6 mb the previous week, but only after it had fallen by 308 mb in the three weeks prior to that. Nearly all of the most recent increase came from a sharp reduction in the number of short positions, which fell by 87 mb, rather than an increase in long positions, which were up by just 2 mb. Hedge fund managers gradually accumulated short positions between mid-April and mid-May amid growing concerns about the pace of the rebalancing. However, as the OPEC meeting approached, many of those short positions were closed as a precaution against any surprise in the market.

The daily average traded volume for NYMEX WTI contracts surged 134,095 lots, or 12%, to 1,251,216 contracts, while that of ICE Brent was 124,025 contracts higher, up 13% at 1,087,563 lots. The daily aggregate traded volume for both crude oil futures markets increased a hefty 258,120 contracts to 2.34 million futures contracts, or near 2.3 billion b/d of crude oil. The total traded volume NYMEX WTI futures in May was significantly higher at 27.53 million contracts, up 30%. Similarly, ICE Bent futures volumes increased 31% to 23.93 million contracts.

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