The pooled Brent and WTI futures and options contracts together remain very high at 926k lots, just slightly below the record high noted in the week before at 934k lots. There was, however, a minor deterioration in the net lengths last week by 7.8k lots on the back of increased short positions for both Brent and WTI.
The record-high net length presents a big risk to oil structure, especially if markets were to weaken on the back of increased supply from shale producers in early 2018, any other disrupted supplies were to return or refinery processing rates were to decline on seasonal maintenance. North Sea supply from Forties pipeline, Kirkuk Ceyhan pipeline disruption, Canadian flow backed up due to Seaway disruption are just adding to the temporary tightness in the market as we enter 1Q’2018.
What is clear is that on the back of the OPECNOPEC deal and robust demand for oil and oil products, the global oil market looks well balanced in 2018, in our view, with potential supply-side disruptions or increases swaying prices in either direction.
The pact to curb oil output by 1.8 million barrels a day (bpd) was agreed and implemented last winter by OPEC, Russia and nine other global producers. The deal was owing to end in March 2018, having already been extended once. Consequently, energy commodity prices prolonged to be cushioned by production cuts led by the OPEC and Russia. Good news is that the producers agreed in December to extend current oil output cuts until the end of 2018.
However, in 1Q’2108 there are clear risks of a slowdown in Chinese imports as refineries go offline for maintenance, Kirkuk-Ceyhan oil flows return, the Forties flows return, US supply increases and demand is lower than anticipated if winter is warmer than predicted. All of this on top of a high base effect could disappoint money managers as physical markets might weaken in 1Q or 2Q, leading to an exacerbated move down as money managers unwind their net lengths. Any noise out of OPEC-NOPEC suggesting an early exit from the deal in 2018 could also lead to a sell-off as quickly as the builds have taken place. We at FxWirePro project crude price to oscillate within the range of $55-$65 range in Q1’2018.