Baku, Azerbaijan, Dec. 4
By Maksim Tsurkov – Trend:
Crude oil held steady after Opec and Russia showed unity and extended production cuts until the end of 2018, Ole Hansen, head of commodity strategy at Saxo Bank, told Trend Dec. 4.
Gold's November trading range was the tightest since 1999 while industrial metals retraced on continued worries that the outlook for Chinese growth and demand may underwhelm, he noted.
“Oil traders attention were fixed on Vienna where Opec and non-Opec producers met to discuss how to proceed with the process of bringing balance between supply and demand for crude,” he said. “In the end they delivered what the market had been pricing in: A nine-month extension of the current deal to keep 1.8 million barrels/day from the market until the end of 2018. In addition, Libya and Nigeria agreed not to lift production beyond their respective 2017 peaks while Russia was appeased with a review date in June next year.”
“Gold traded within its tightest monthly range (measured in percent) since 1999 last month while a lower monthly trading range than November's 33 dollars was last seen in 2005 when gold traded at $465/oz. The market remains stuck between the negative pull of rising rates and underlying demand from investors seeking tail-end protection against geopolitical events and the rising risk of a stock market correction.”
“Gold has now been range-bound in a relatively tight range around $1282/oz for the past three months,” he noted. “Resistance at $1300/oz was challenged this week during the Japanese yen's failed attempt to break higher. A stronger dollar, higher bond yields and speculation that the US tax bill would pass helped send the yellow metal straight back down to test support located just below $1270/oz.”
“The Bloomberg Industrial metals index was on track to record its worst week since March. The weakness was led by nickel which continued to pare back recent gains which were driven by euphoria about future demand from the electric vehicle industry. Copper lost more than 3% with this bellwether metal seeing funds selling in response to rising concerns about the prospects of the Chinese economy over the coming year. The weakness occurred despite Eurozone data continuing to point towards the best year for its economic growth in a decade.”
“Weakness among industrial metals added to silver's woes as it recorded its worst week in five months,” he said. “This resulted in the gold-silver ratio breaking to the upside and touching its highest level since April 2016. Silver tends to struggle relative to gold when the demand is driven by diversification and safe haven demand. Adding to this its credentials as a high beta gold meaning it tends to swing more violently, not least to the downside, given the current reductions in ETP holdings and a relative elevated hedge fund long.”
“Crude oil held steady Friday just below a two-year high. This following Opec and non-Opec producers' decision to play safe and maintain output cuts throughout 2018. Russia had raised some concerns ahead of the meeting as it seemed they were balking at the prospect of ordering their producers to keep the taps turned down for another nine months. In order to meet Russian concerns it was agreed to review the deal at the next ordinary Opec meeting on June 22 while Libya and Nigeria agreed not to lift production beyond their respective 2017 peaks.”
“The show of unity in Vienna was a classic example of realpolitik with the economic importance of keeping prices supported outweighing fraught relations between several countries, not least between Saudi Arabia supported by its GCC allies and Iran, often supported by Russia,” he noted.
“Much now hinges on continued compliance from the group with Iraq potentially being one of the candidates struggling to keep its commitment,” he added. “While southern Iraqi oil sales have jumped to a record, Jabbar al-Luaibi, the oil minister, in Vienna expressed some very ambitious plans to improve the fields around the northern city of Kirkuk. Back in October Iraq regained control of the area from the Kurdish Regional Government. A move which led to a temporary drop in supplies from northern Iraq to the Turkish port of Ceyhan and which helped support the oil rally back then.”
“Attention will now increasingly turn to the US with the market trying to gauge the impact on production growth from a price trading well above $50/b. Weekly production estimates continue to reach new highs and during the past three weeks US drillers have added back almost half of the rigs that were pulled during the previous three months.”
“A major shift in US oil and products trading with the rest of the world has occurred this year,” he said. “Rising production of oil has increasingly found its way into the global market, both as refined products and since 2014 increasingly also as crude oil exports. Last week the net-import of crude oil and products slumped to just 1.8 million barrels/day, a far cry from the 10 million plus barrels witnessed just six years ago.”
“While rising US production may pose a medium-term challenge to oil prices the biggest short-term challenge remains the near record long position currently being held in WTI and Brent crude oil futures. Money managers have been active buyers of crude oil since July. The combined net-long in Brent and WTI was close to 900 million barrels in the week to November 21, not far from the February record of 930 million.”
“Opec has over the years become increasingly aware of the impact of speculative positioning in the oil market and meeting in Vienna this week they knew that failing to deliver what the market expected could have triggered a major correction due to position adjustments,” he added.
“A position this size needs to be fed bullish news in order to avoid the temptation of booking profit,” he said. “The period ahead of the holiday season and New Year tends to see reduced liquidity and this could make the oil price particularly vulnerable should the Opec focus be replaced by worries about rapid US production. Rystad, the respected independent oil and gas consulting service company based in Norway, this week forecast that US oil production could reach 9.9 million barrels/day this month, well above what anyone, including the EIA, had been forecasting up until now.”
“With the Opec meeting behind us the short term risk to oil looks skewed to the downside during what is normally a low-demand season. WTI crude oil has spent the past few weeks consolidating above $55/b, currently the level of support. The upside potential is focusing on $60/b, a key psychological level around which we saw nine weeks of trading during the second quarter of 2015.”