Oil Markets Are Ignoring Imminent Production Cuts By 3 OPEC+ Members

Oil prices edged higher in Wednesday’s intraday session, with Brent crude for November delivery up 2.12% to trade at $70.66/barrel at 14:46 hrs ET while WTI crude for October delivery gained 2.39% to change hands at $67.32/barrel. 

The reversal in the oil price selloff came amid more shutdowns by oil and gas operators in the Gulf of Mexico with hurricane Francine expected to make landfall Wednesday afternoon or evening along the Louisiana coastline. According to the Bureau of Safety and Environmental Enforcement (BSEE), energy companies have shut in close to 40% of oil and almost 50 percent of gas production in the Gulf of Mexico as the storm closes in.

However, it’s doubtful whether the Gulf of Mexico shutdowns will generate enough momentum to fully reverse the months-long oil price selloff. After all, hedge funds and other money managers have turned the most bearish on crude ever since the CFTC started to publish information on market positioning, with speculative positioning in crude oil currently extremely short.

Brent and WTI net longs totaled a mere 139,242 lots in the week ended September 3; net speculative long bets across the four Brent and WTI contracts clocked in at a mere 2.3% of open interest, the lowest level going back to the start of 2011 and 2 percentage-points below the pandemic-era low.

Net selling over the past week came in at 108.8 million barrels (mb), bringing cumulative net selling over the past eight weeks to 311.2 mb. Meanwhile, commodity analysts at Standard Chartered have reported that the bank’s proprietary money-manager crude oil positioning index has sunk to -100.0 for the first time this year.

According to commodity experts at Standard Chartered, there has been little so far to discourage trend-following algorithms from increasing the size of their short positions, with Brent having settled lower on 14 of the past 20 trading days and intra-day highs have been lower on 16 of those 20 days, including all of the past eight.

StanChart says the current extreme in positioning is based on incorrect expectations of a looming crude oil surplus coupled with weakening economies in China, U.S. and Europe. More importantly, traders are overlooking the imminent removal of even more barrels from the markets in the coming months.

Back in July, Russia, Iraq and Kazakhstan submitted their compensation plans to the OPEC Secretariat for overproduced crude volumes for the first six months of 2024. According to OPEC, the entire over-produced volumes will be fully compensated for over the next 15 months through September 2025, with Russia ‘paying back’ a cumulative 480 kb/d, Iraq 1,184 kb/d and Kazakhstan 620 kb/d.

According to StanChart, the compensatory output cuts by the three OPEC members work out to a combined 370 kb/d reduction in October, and then an amount varying between 162 kb/d and 206 kb/d for November 2024 through to September 2025. StanChart has worked out that adding the compensation schedule to the recently announced reduction in targets due to delaying the implementation of tapering will result in OPEC production clocking in at 530 kb/d lower in Q4-2024; 540 kb/d lower in Q1 and Q2-2025 and 560 kb/d lower in Q3-2025, if all commitments are kept. StanChart has argued that the market’s current assumption that there will be no compensation reduction is wrong because it’s highly unlikely that other OPEC+ countries would take it lightly. StanChart says Saudi Arabia, in particular, is unlikely to accept any further backsliding on promises made by the overproducers, noting that the high-profile visits to Iraq and Kazakhstan by the OPEC Secretary General, Haitham al Ghais suggests that OPEC intends to follow up on the promised cuts.

“I received strong assurances that Iraq continues to be fully committed to the DoC’s ongoing market stabilization efforts. During this visit, Iraq presented clear and determined steps to compensate for overproduced volumes and gave assurances that it would achieve full conformity going forward, ”al Ghais said after visiting Baghdad.

Regarding the near-term oil price outlook, Standard Chartered’s proprietary machine-learning tool SCORPIO has predicted a $3.02/barrel increase in dated Brent for the week ending September 16. StanChart notes that whereas it’s going to take time for oil markets to start paying attention to actual fundamentals, positioning has turned extreme enough to skew price risks to the upside.