Oil traded near its highest level since 2015 on Wednesday, having risen above $67 a barrel during the previous session. The sustained strength came after hedge funds placed a record bet that Brent crude’s near 35 per cent rally over the past six months will continue into the new year, with protests in Iran stoking buying. While Iran’s oilfields have so far been unaffected by the largest protests against the Islamic Republic in almost a decade, traders said renewed risks in Opec’s third-biggest producer had added to momentum as prices test new peaks.
Geopolitical risks are clearly back on the crude oil agenda after having been absent almost entirely since the oil market ran into a surplus in the second half of 2014,” said Bjarne Schieldrop at Nordic bank SEB. “Geopolitical risks started to impact the oil price again last autumn as production cuts then had drawn inventories significantly lower.” Brent crude oil, the international benchmark was at $66.55 a barrel in early Wednesday trade, leaving it within touching distance of Tuesday’s intraday high of $67.29. The rally in prices since June has come as Opec-led production curbs designed to end a three-year old oil glut have helped tighten the market.
Prices had crashed from above $100 a barrel in 2014 as US shale production swamped the industry, leading the cartel to ultimately align with Russia in pursuing production curbs to drain stocks and raise the price. The Opec and Russia-led curbs, which they have agreed to extend throughout 2018, have set up a potential showdown with the US shale industry now that prices are back above $60 a barrel.
The US Energy Information Administration forecast in December that US oil production would rise by 780,000 barrels a day in 2018, a figure that could rise higher if prices remain strong, though question marks about the still relatively nascent industry’s strength remain.
While global oil demand is forecast to rise by about 1.4m barrels a day next year, growing US shale output combined with new projects in Brazil and Canada are broadly expected to see non-Opec supply rise by a similar amount. Hedge funds are, however, betting that prices are likely to head higher, with some arguing that geopolitical unrest — including in Opec member Venezuela, where oil output has been falling — should keep prices well supported.
Saudi Arabia, the largest producer in Opec, is also set to list part of its state oil company Saudi Aramco while it pursues broad economic and social reforms, incentivising the kingdom to try and keep prices elevated. Funds across Brent and WTI now control net paper positions equivalent to more than 1bn barrels of crude — or more than 10 days worth of global demand — betting prices will keep heading higher, according to exchange and regulatory data.
Ole Hansen, analyst at Saxo Bank, cautioned that the large fund position could weigh on the market if money managers decide to take profits following the strong rally since June, but so far there has been little evidence of widespread selling. The restart of the North Sea Forties pipeline system, which had cut off about 450,000 b/d of supplies in the second half of December, has not yet added significant pressure to the market. “During the quiet and shortened trading week up until December 26, hedge funds continued to buy into the price strength,” Mr Hansen said.( Source: Financial Times)