Special Edition: Year-End Oil Market Analysis

December 2, 2019 | By Denton Cinquegrana

Prior to a post-Thanksgiving sell-off that took crude oil down several dollars and products down 6-8cts/gal, oil prices had been showing strength of late, inching toward the elevated levels from mid-September when markets were grappling with the loss of Saudi Arabian production following a major attack.

Monday morning, futures were moving higher, after the U.S. holiday weekend decline.

Several data points and upcoming events offer support to the market, but open to question is whether prices will have staying power at the higher levels. West Texas Intermediate (WTI) crude oil futures have found a bit of comfort above $58/bbl, with Brent cozying up to $64/bbl.

Most analysts expect OPEC and non-OPEC producers to keep existing production cuts in place. There’s been talk of deeper cuts, but few producers appear to have the appetite for that. With the “chalk” pick unchanged, those accumulating long oil positions ahead of the conclave are pinning their hopes to a surprise production action that few believe will materialize.

Other buying inspiration may be coming from the upcoming IMO sulfur cap, belief in a spike in demand from increased crude oil runs at refineries or perceptions that U.S. production increases have been overestimated.

Geopolitics continue to loom in the background. Headlines suggesting France may reimpose Iran nuclear sanctions and recent optimism about on-again, off-again U.S.-China trade negotiations have also been factors that have lent support to oil prices recently.

Whatever the cause of the buying, market sentiment appears to have changed over the past several sessions. Total open interest in WTI was on the rise over the last week, reaching the highest levels at just shy of 2.2 million contracts. Commodity Futures Trading Commission data would typically offer some context, but the most recent data pre-dates the recent price move and spike in open interest.

From a technical standpoint, oil prices have a tailwind behind them. They are higher than most of the more significant moving averages and, based on other gauges, the recent run higher has not left the market in an overbought situation.

However, that does not guarantee prices smooth sailing through the end of the year. U.S. crude oil inventories are growing and continue to hold solidly above the five-year average. And while the EIA’s weekly production figures are modeled, relatively “low-resolution” numbers, the 13 million b/d level is within reach over the next couple of weeks.

That all-time high number for U.S. crude oil output has the potential to shock the market and reverse the current upside trend. The holiday cast of December also has a tendency to make the month a tough time to maintain any sort of momentum.

 

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