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Analytics, 12 November 2021

Oil Price Brief

Oil prices fell on Friday, with both Brent and WTI crude reversing their previous session’s gains as the dollar continued to firm on expectations that the U.S. central bank will bring forward an increase to interest rates to tame inflation.

The Organization of the Petroleum Exporting Countries (OPEC) on Thursday cut its world oil demand forecast for the fourth quarter by 330,000 barrels per day (bpd) from last month’s forecast as high energy prices hamper recovery from the economic fallout from the COVID-19 pandemic.

OPEC also raised its supply forecast from U.S. shale producers next year, a potential headwind to the efforts of the group and its allies to balance the market.

Hedge funds have been liquidating their long positions to take profits from the recent oil price rally. But remained bullish on oil prices in the short term. The U.S. Energy Information Administration (EIA) expects Brent prices will remain near current levels for the rest of 2021, averaging $82 per barrel in the fourth quarter of 2021.

Brent and WTI crude reverse previous session’s gains

Brent crude futures dropped 86 cents, or 1%, to $82.01 a barrel and U.S. West Texas Intermediate (WTI) crude was down $1.08, or 1.3%, at $80.51. Both benchmark crude contracts were poised to end the week lower after sharp swings driven by a strengthening dollar and speculation on whether the Biden administration might release oil from the U.S. Strategic Petroleum Reserve to cool prices.

There are positive signs on the demand side, with air travel picking up rapidly, but tighter monetary and fiscal policy and the looming northern hemisphere winter will act as a dampener.

OPEC trims oil demand outlook

The Organization of the Petroleum Exporting Countries (OPEC) on Thursday cut its world oil demand forecast for the fourth quarter by 330,000 barrels per day (bpd) from last month’s forecast as high energy prices hamper recovery from the economic fallout from the COVID-19 pandemic.

“A slowdown in the pace of recovery in the fourth quarter of 2021 is now assumed due to elevated energy prices,” OPEC said in the report. OPEC also cited slower-than-expected demand in China and India for the downward revision.

Oil has risen to a three-year high above $86 a barrel this year as OPEC+ only gradually ramps up supplies and demand rises, boosting pump prices to the highest in years in some markets. Natural gas, power, and coal prices have also soared. Governments, companies, and traders are closely monitoring the speed with which demand recovers. A slower pace could ease upward pressure on prices and bolster the view that the impact of the pandemic will curb demand for good.

OPEC now sees world consumption surpassing the 100 million bpd mark in the third quarter of 2022, three months later than forecast last month. On an annual basis according to OPEC, the world last used over 100 million bpd of oil in 2019. The producer group stuck to its forecast that demand will rise by 4.15 million bpd next year. This will take consumption to an average of 100.6 million bpd, above the 2019 level.

Shale Rebound Seen

The OPEC, in a monthly report also raised its supply forecast from U.S. shale producers next year, a potential headwind to the efforts of the group and its allies, known as OPEC+, to balance the market. OPEC sees the output of U.S. tight oil, another term for shale, rising by 610,000 bpd in 2022, up 200,000 bpd from last month’s forecast, after a contraction this year, as higher prices prompt more investment.

The OPEC US shale forecast came as the U.S. Energy Information Administration (EIA) kept its Brent spot average price forecasts for 2021 and 2022 flat in its latest short-term energy outlook (STEO).

The EIA noted that it “expects Brent prices will remain near current levels for the rest of 2021, averaging $82 per barrel in the fourth quarter of 2021. In 2022, we expect that growth in production from OPEC+, U.S. tight oil, and other non-OPEC countries will outpace slowing growth in global oil consumption and contribute to Brent prices declining from current levels to an annual average of $72 per barrel.”

Hedge Funds take Profits but Believe Oil Prices will continue rising

Portfolio managers are still betting on higher oil prices in the short term, despite liquidating some of their long positions to take profits from the price rally in recent weeks. Hedge funds reduced their net long position—the difference between bullish and bearish bets—in Brent Crude and WTI Crude for a fourth week running in the week to November 2. The decline in the net long, however, was mostly driven by a liquidation of longs rather than an opening of short positions as money managers sought to take profit before the Fed policy announcement and the OPEC+ group’s decision on oil supply.

Overall, in the week of November 2—the latest reporting week in the Commitment of Traders (COT) report—hedge funds continued to believe that oil prices could go higher.

Portfolio managers’ positioning in the most actively traded petroleum futures and options contracts still points to a prevalent bullish sentiment in the market, which is also reflected in the latest forecast from the U.S. Energy Information Administration (EIA) and the latest outlooks on oil demand by major investment banks and oil companies.

In the week to November 2, hedge funds sold the equivalent of 45 million barrels in the six most important petroleum-related contracts, according to estimates by Reuters market analyst John Kemp based on the latest COT report. But the sales were overwhelmingly driven by liquidation of longs, not new shorts, suggesting that portfolio managers took a breather and took profits after the October rally in oil prices.

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