The Brent price has dropped USD 10/bbl over the last three weeks to levels last seen at the start of August, when the oil price was recovering sharply from its 2Q12 sell-off, boosted by Israeli Prime Minister Netanyahu’s belligerent comments over Iran, in our view.
Given the volatility in the oil price over the last year, it is probably too early to state definitively that the oil price is correcting downwards since it has yet to breach even one standard deviation from the mean. However, it remains our view that a substantial correction is likely given the over-supply we believe exists in the market.
We believe expectations of an imminent attack on Iran, or any related supply disruption sufficient even to bring the market back into balance, are rapidly fading. There is also growing confirmation that North Sea production is finally returning to full flow after maintenance impacted supply considerably more than had been generally expected, typified by the delayed re-start of the 200kboe/d Buzzard field which is now reported to be ramping up smartly.
So we would not be surprised if oil markets continued to sell-off significantly.
US non-commercial futures and options (F&O) positions in WTI have been falling sharply, with Managed Money net F&O positions down 11% for the week to 30 October at 122,863 net longs, the second lowest net long position over the last 12 months. ICE Brent non-commercial F&O positions have also been sold aggressively in the Managed Money category in the last two weeks to 30 October, although this has been offset by a sharp increase in Swap Dealer positions. Nevertheless total non-commercial net longs are down to 87,232 positions, over 50% off their late August high point.
If the correction we envisage is now under way, it could quite easily see Brent revisit its year-low of USD 89 on 21 June, we believe. We expect that severe weakness below USD 100/bbl would be required to force OPEC to cut production sufficiently to at least balance the market. We continue to believe that will most likely occur as a result of Saudi Arabia being willing to take all or most of the 1mmb/d of production it added last summer off the market. We would see that as a likely trigger to become more constructive on the Brent price outlook.