Oil bulls are charging into the new year with unprecedented vigor — and the credit goes to OPEC.
The signs that the group is winning its tug of war with shale are compelling, and money managers have taken note: Their combined bets on rising prices for West Texas Intermediate (WTI) and Brent crude reached record levels this month.
“At least through the first half of 2018, they’ll stay pretty bullish,” said Ashley Petersen, lead oil-market strategist at Stratas Advisors in New York. “June will be a real turning point, because that’s when we’ll hear about unwinding the deal, and if OPEC doesn’t handle it delicately, then there will be concern that the market will be flooded with oil again.”
The last week of the year saw futures trading above US$60 a barrel in New York and US$67 in London for the first time since mid-2015, after the two most important oil benchmarks surged more than 40 percent from their doldrums in June.
The rally came on the back of a well-orchestrated campaign led by Saudi Arabia and Russia to enforce and extend supply curbs implemented by OPEC and other oil-producing nations.
The effort culminated with a meeting in Vienna last month, where the group and its allies agreed to extend the cuts through the end of next year.
Meanwhile, US crude stockpiles have declined by about a fifth since peaking in March and approached the end of the year at their lowest level since October 2015.
While the threat of too much shale production next year still looms, producers are ending the year a lot less gung-ho than they started. Under pressure from investors to focus on profits over growth, explorers have slowed down on drilling with the US rig count stalling this month.
“The expectation is that the rebalance will continue,” Gene McGillian, a market research manager at Tradition Energy in Stamford, Connecticut, said by telephone. “We’ve approached an area where we really need to see a steady diet of positive information.”
The optimism was not so widespread earlier this year. Concern that OPEC’s efforts were not enough and would end abruptly in March next year led short-sellers to dominate the scene for several months, with WTI plunging to the low-US$40s in June.
“It really wasn’t until the fourth quarter that we saw a resounding faith in the recovery,” Petersen said.
Global events also swung the market up and down along the way, such as Hurricane Harvey, supply disruptions in Libya and Kurdistan, a pipeline shutdown in the North Sea and a brutal cold snap in the final week of the year that drove up demand for heating oil, fuel oil and natural gas.
One of the most remarkable shifts that occurred this year, if a very technical one, was the change in the futures curve — first for Brent and more recently for WTI.
Contracts for nearby delivery are trading at a premium to longer-dated ones as demand rises and supplies tighten.
This pattern, known as backwardation, had not been seen so consistently since 2014.
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