Oil markets retained strength over the past week following the OPEC+ JMMC meeting which had sent positive signals to the oil markets. CFTC data shows that money managers increased their net-length in WTI crude contracts by 38.431 million barrels to 332.26 million barrels, the highest in two months, while also increasing their net-length positions in Brent crude contracts by 20.022 million barrels to 140.130 million barrels in the week ending October 20th, the highest in seven weeks.
A cut extension in 2021 is now more likely
A statement from the Russian President showed that Saudi Arabia and Russia are in agreement about the extension of the current cuts of 7.7 million bpd through 2021, a possibility that we had noted previously.
This possibility has now become very likely as Libya continues to ramp up production, which currently stands at 525,000 bpd. Another Important factor is the likelihood of lockdown measures being imposed in many of the bigger economies around the world including France, Spain, and the UK.
Bearish forces in the markets include the rising concerns about lockdown measures in Europe, rising production from Libya, and rising gasoline stocks in the United States. Last week, a permanent ceasefire agreement was signed between the fighting parties, which is expected to boost the stability of oil production and export operations. As a result, Libyan oil production is expected to rise to 1 million bpd within the next four weeks. Canadian producers are also expected to increase production In early 2021 as authorities are looking to lift output restrictions in December. The oil province of Alberta had participated in market-driven cuts by 880,000 bpd, which accounts for 22% of its peak production, to support the OPEC+ 9.7 million bpd cut back in April. Current prices seem sufficient for Canadian production to resume production. Last week, Brent closed at $41.77 down by 2.70% w/w while WTI closed at $39.85 down by 2.52% w/w.
Although statements from the Russian President have partially supported prices by highlighting the possibility of extending current cuts, there still seems to be a lot of uncertainty among OPEC+ members about the details. An agreement between Saudi Arabia and Russia on the cut extension will also need the support from other countries in the OPEC and OPEC+ group especially those who missed their production targets in 2020. This may prove to be difficult given the fact that many countries including Iraq and Nigeria have struggled to meet their targets in the previous months.
Decline in US oil demand due to COVID-19 and winter season
Meanwhile, US crude oil stocks continued to decline despite demand concerns. Last week, the EIA reported a withdrawal of 1 million barrels from commercial crude oil stocks to record a level of 488.1 million barrels. This is also associated with a decline in the SPR, which currently stands at 640.1 million barrels, down by 800,000 bpd barrels w/w.
Furthermore, a sharp decline was also recorded in middle distillates stocks, which currently stand at 160.7 million barrels, down by 3.8 million barrel w/w. Gasoline stocks, however, rose by 1.9 million barrels to stand at 227 million barrels which may be attributed to the rise in Covid-19 cases reducing demand for gasoline. Refinery processing also declined by 551,000 bpd to stand at 13.06 million bpd, a clear indication of a decline in transport fuel demand as we move towards the winter season. Additionally, U.S. crude oil production declined by 600,000 bpd to stand at 9.9 million bpd while U.S. crude oil net imports also declined by 1.07 million bpd. Apparent U.S. oil demand declined to 15.12 million bpd, down by 1.62 million bpd w/w.
Zeta storm to have a limited impact on markets
This week, the markets will also be monitoring tropical storm Zeta in the Gulf of Mexico, which could potentially lead to another supply disruption as drillers pre-emptively shut down platforms. The storm is expected to hit the northern part of the gulf coast, yet it is not expected to be as strong as the Delta hurricane two weeks ago. So far, Zeta is the 27th named storm in the 2020 Atlantic hurricane season. The number of storms and intense hurricanes in the Gulf of Mexico is set to rise as the temperature of the ocean continues to increase. This may continue to form an issue of supply disruption concern in the long term for an area with a production of around 1.7 million bpd.