Brent crude has hit a new low for 2018, with the international benchmark down 3% last week to its lowest level in 13 months.
West Texas Intermediate, the main U.S. contract, fell 4.5% to $52.09. Investors have taken fright in a relatively short space of time that the market is looking increasingly oversupplied.
Hedge fund long positions are being exited at pace and the smart money that had shorted the market are looking at gains of 16% since October, according to the Financial Times.
Such success stories though are in the minority, as many funds have got their fingers burned at the rapid reversal in oil’s fortunes.
Pierre Andurand, who runs the biggest and best-known specialist oil fund in London, has struggled in 2018, as his bullish bets on crude have failed to pay off, the article reports.
As the Financial Times observes, the oil price slump has come as market sentiment has flipped violently from very bullish ahead of the imposition of U.S. sanctions on Iran to incredibly bearish after more supplies than expected hit the market.
The lackluster application of sanctions on Iran has not helped. President Trump’s waiver of sanctions against most of Iran’s biggest clients means expectations of the loss of supply due to sanctions have been rapidly scaled back. Meanwhile, demand projections are softening as global GDP growth expectations are falling. On the supply side, production in the U.S. has surpassed expectations.
The shale boom is contributing to total output reaching 11.35 million barrels a day in August, on course to end the year at a record level, according to the U.S. Energy Information Administration (EIA). This year, the U.S. surpassed both Russia and Saudi Arabia to become the world’s largest crude oil producer, the first time the U.S. has led the world in oil output since 1973.
According to the EIA, U.S. crude-oil production will average 10.9 million barrels a day in 2018, up from 9.4 million b/d in 2017, and forecasts output of 12.1 million b/d in 2019.
In the face of such an unprecedented rise in supply, OPEC and its partners would have to curtail an unrealistic level of production to bring the market back into balance.
Most oil producers, Saudi Arabia included, require a U.S. $80/barrel price to balance its state finances. In an article appearing on The Hill, OPEC is reported to be considering “to uphold current output goals,” which were initially set in 2016. The move, according to the Wall Street Journal, would signify a production cut because the country overproduces oil by around 1 million barrels per day.
But it is doubtful if even that level of cutback would be enough.
With Iranian production only slightly constrained and Venezuela’s falling output already factored in by the market, investors may well see the supply-demand balance still firmly in favor of supply.
Hedge funds appear, for the time being, to agree, dumping long positions and going short during the month of November.
This time they may be right.
The last time we were in an oversupply situation, the price was down to $40 a barrel; such a level would certainly slow significant further investment in tight oil. An oilprice.com article back in the summer reported WSJ data suggesting even at $50 a barrel, half the drillers were not making money.
That may represent a floor for 2019. Either way, lower oil prices will be a boon for consumers, both industrial and private, helping to buoy the economy as tax benefits wane.