On Friday, Nov. 23, 2018, oil prices dropped to nearly 8 percent. This is the lowest in over a year. According to Reuters, this is “the seventh consecutive weekly loss, amid intensifying fears of a supply glut even as major producers consider cutting output.”
The U.S.-produced oil supply is growing faster than demand. To avoid a build-up of unused fuel the Organization of the Petroleum Exporting Countries is expected to cut output after they meet on Dec. 6.
Oil prices have dropped more than 20 percent in November thus far, setting them on a course for the biggest one-month decline since 2014.
The trade war between the world’s two largest economies and oil consumers, the U.S. and China, has weighed on the market.
Phil Flynn, an analyst at Price Futures Group in Chicago, referred to the expected talks between President Donald Trump and Chinese President Xi Jinping at the G20 summit, stated, “The market is pricing in an economic slowdown – they are anticipating that the Chinese trade talks are not going to go well. The market doesn’t believe that OPEC is going to be able to act swiftly enough to offset the coming slowdown in demand.”
Brent crude futures fell to $3.80 a barrel, or 6.1 percent at $58.80, according to Reuters. During the session, the benchmark dropped to $58.41, which is the lowest it has been since October 2017.
U.S. West Texas Intermediate crude (WTI) lost $4.21, or 7.7 percent, to trade at $50.42. In post-settlement trade, the contract continued to drop.
For the week, Brent dropped 11.3 percent and WTI dropped 10.8 percent. This is the largest one-week drop since January 2016.
China reported its lowest gasoline exports in over a year amid a glut of fuel around the world.
There are stockpiles of gasoline across Asia, with inventories in Singapore, the regional oil refining hub at a three-month high. Japanese stockpiles have also climbed. Inventories in the U.S. are 7 percent higher than they were a year ago.
Crude oil production has also soared. The International Energy Agency anticipates non-OPEC output alone to rise by 2.3 million barrels per day (bpd), while demand next year is expected to grow 1.3 million bpd.
Regardless, Trump has made it clear, he does not want oil prices to rise. There are many analysts who believe Saudi Arabia is coming under pressure from the U.S. to resist calls from other OPEC members to lower the crude oil output.
Analysts say that if OPEC decides to cut oil production next month, oil prices could recover.
“We expect that OPEC will manage the market in 2019 and assess the probability of an agreement to reduce production at around 2-in-3. In that scenario, Brent prices likely recover back into the $70s,” says Morgan Stanley commodities strategists Martin Rats and Amy Sergeant.
If OPEC does not pull back on production, prices could drop significantly lower, potentially depreciating toward $50 a barrel, according to Lukman Otunuga, research analyst at FXTM.
By mid-November 2018, commodity trading advisory funds tracked by Credit Suisse prime services dropped 1.5 percent.
Mark Connors is the global head of portfolio and risk advisory at Credit Suisse. He told Reuters that the action among macro and CTA funds reflects a risk-aversion trade, as new long positions have fallen from five-year highs to roughly even exposure between longs and shorts.
Hedge funds and other money managers cut their net long positions in Brent by 32,263 contracts to 182,569 in the week ending Nov. 20, according to information provided by the Intercontinental Exchange (ICE) on Friday. That is the lowest net long position since December 2015.
Volatility is a measure of investor demand for options. It has spiked to the highest since late 2016, above 60 percent. Investors are purchasing protection against further steep price declines.
The decline in oil prices pulled U.S. energy shares lower. Exxon Mobil Corp and Chevron Corp dropped more than 3 percent and were the leading decliners on the Dow Jones Industrial Average. Additionally, Oilfield service providers Schlumberger NV and Halliburton Co dropped 3 percent.
By Jeanette Smith
Reuters: Oil Plunges Nearly 8 Percent Despite Talk of Output Cut
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