Oil Slips on Dollar's Strength but OPEC Provides Balance

Posted by Joseph Keefe

OPEC secretary general optimistic on output
cuts.

Global oil prices slipped on Wednesday as the U.S. dollar, in
which payments for crude are made, rose but they traded broadly
at multi-week highs after OPEC signalled optimism over its deal
with other producers to curb output.

The U.S. West Texas Intermediate April crude contract , the new
front-month future, was down 37 cents, or 0.7 percent, at $53.96
a barrel at 1310 GMT.

Brent crude was down 35 cents, or 0.6 percent, at $56.83, having
touched its highest since Feb. 2 at $56.31 in the previous
session.

Nevertheless, an agreement by major oil producers under the OPEC
umbrella, which came into place at the start of this year, lent a
floor to oil prices.

Mohammad Barkindo, secretary general of the Organization of the
Petroleum Exporting Countries, told a conference on Tuesday that
January data showed conformity from member countries in the
output cut at above 90 percent.

Adding to the bullish sentiment, hedge funds raised their
combined net long position in the three main derivative contracts
linked to Brent and WTI by 51 million barrels last week, holding
a net long position equivalent to a record 903 million barrels of
oil.

The combined net long position has a notional valuation of more
than $49 billion.

"While net length in Nymex crude has grown more or less
uninterrupted since the OPEC cut decision towards the end of last
year, its share of total open interest in the contract has now
reached the highest level since July 2014, back when WTI was
trading in triple digits," JBC Energy analysts said in a note.

Both OPEC's Barkindo and Goldman Sachs, according to a new
research note to clients, expect global inventories to fall,
which would boost prices.

Such predictions have prompted several analysts and market
players to note the near backwardation of both Brent and WTI oil
prices as investors begin to reduce their future hedges.

"The race is now on for the near-term market structure to shift
into backwardation. Excluding expiry dates, this has not happened
since April 2016 on Brent and November 2014 on WTI," analysts at
PVM wrote in a note.

Goldman Sachs, however, noted that a rebound in U.S. drilling
activity had exceeded even its own above-consensus expectations.

"While the reduction in supplies out of core OPEC in the Gulf and
Russia has exceeded our and consensus expectations, the market is
starting to doubt that this will be sufficient to translate into
large oil inventory draws by 2Q17," it said.

In the meantime, crude oil inventory data from the United States
will potentially guide the markets for the rest of the week. The
data is set to be released on Thursday, a day later than normal,
following a U.S. public holiday on Monday.

"The DoE data tomorrow will be where we get our next impetus,"
said Michael McCarthy, chief market strategist at CMC Markets in
Sydney, referring to the U.S. Department of Energy's official
weekly numbers on stockpiles.

By Sabina Zawadzki

Feb 22, 2017

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