Even a mature commodity like oil seems to be losing its attractiveness to big speculators taking on long positions. Hedge funds and other big players dumped a large amount of long positions on Brent and WTI. They still retained a large portion of them, but there was a substantial increase on short position, which raises the question just how big is the anxiousness to exit or at least balance the positions. This coincided with the oil price slide below $50/bbl. It has since recovered enough to hover around the $50/bbl mark, but there is still no reason to get bullish about it.

It seems that despite the agreement between OPEC and other producing countries to cut production, the price is stubbornly stuck somewhere in the $50/bbl to $55/bbl range. The stockpile of crude oil in US has not dwindled despite the production cut. Quite the opposite, the report released by US authorities on 22 March even shows an increase. Should this state continue in the near future, OPEC will most likely be pressured to prolong the production cut agreement.



It seems it is getting rather difficult to wage a price war where both sides benefit from the same outcome. Saudi Arabia, the most bitter competitor to US shale oil producers, needs higher prices to mend their deteriorating economic condition, diversify toward less oil-focused economy and fund government spending. On the other hand, the US shale and gas producers may even expect an increase in production costs this year. A rather troublesome prospect for the more marginal producers already struggling to repay their debts. There are also concerns that quick development and increasing the production of shale oil may hurt the industry by exacerbating the downward trend of the prices.

Moreover, the coming April reassessment of credit lines lenders extend to oil companies may bring a contraction of the borrowing base if the oil prices slide again. But the largest shale drillers are doing better than they did a year ago under the impact of oil price route and there is still room to borrow further. So far a generous credit policy by the banks has given the shale oil producers additional strength to wait out a new period of low oil prices. With this in mind, the next month will be critical for the shale industry.



With the Saudi economy in the middle of a restructuring process and sluggish global economic growth, we may expect the oil glut to persist. One wonders if the recent turn of hedge funds toward short positions signifies a turning point for oil. Could it be that the rising demand in developing countries cannot offset the fall in demand of the more mature developed economies? IEA would disagree as they see rising demand in the coming decades. According to them, further production cuts could even endanger global supplyAt any rate, there will be no final verdict on the issue of production cuts extension until May when the OPEC ministerial summit takes place.

All things considered it may not be wise to dump too many long positions. Low prices are most likely to persist at least until the cut extension is implemented. Another major thing to consider is the growth trend in mature economies and also in China, Brazil and Russia. It is too early to tell whether current sluggishness is here to stay. It is not the time to give up on the future price hikes just yet, but investors should be prepared for the low oil prices in the next months.

David Prezelj
David Prezelj

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