CRANBURY, N.J. (DTN) -- New York Mercantile Exchange nearest delivered oil futures and Intercontinental Exchange Brent futures settled mostly down Friday, with late session short-covering boosting the now expired December ULSD contract off a $1.79 gallon 13-month spot low to a fractional gain, while January Brent expired at a 13-month low on the spot continuous chart.
End-month trading capped a second bearish month, with West Texas Intermediate and Brent down more than $20 barrels (bbl) in November on a rush of supply that obliterated the bullish scenario for a tight fourth quarter market envisioned due to U.S. sanctions on Iranian oil exports that took effect Nov. 5. U.S. waivers on those sanctions were a key driver in the price plunge, as were large revisions in U.S. and world oil production rates.
Friday, the Energy Information Administration (EIA) reported monthly data that showed U.S. crude production in September at 11.475 million barrels per day (bpd), 450,000 bpd more than reported in the weekly statistics. The market first caught wind of the steep revisions in domestic output on Oct. 31 when EIA reported crude production in August at 11.346 million bpd, which compared with weekly data at 10.94 million bpd.
These are massive revisions, with EIA also adjusting its 2018 world oil production projection up 1.22 million bpd on Nov. 6 to 100.09 million bpd, with its short-term energy outlook revising 2019 world oil production up 300,000 bpd to 102.14 million bpd.
Simultaneously, Russian crude production reached a post-Soviet high of 11.41 million bpd in October and Saudi Arabia produced at a record high 11.0 million bpd in early November, making good on its pledge over the summer that it would bring more barrels to the market to ensure adequate supply as U.S. sanctions targeting Iranian oil exports took effect. Instead of driving those exports to zero, the administration sees Iran's oil exports at about 900,000 bpd through early second quarter 2019.
Against sharply higher supply levels, global oil demand was revised down on slowing world economic growth exacerbated by the U.S./China trade dispute, rising interest rates and a stronger U.S. dollar. Suddenly, instead of being drawn down, global oil inventories are now expected to build rapidly, with Saudi Arabia projecting world oil production would outpace demand by 1.0 million bpd in 2019.
"Changes in supply-demand fundamentals contributed little to the September/October price increase," said Bassam Fattouh and Andreas Economou, director and senior research fellow, respectively, with Oxford Institute for Energy Studies, with Brent and WTI futures reaching four-year highs in early October.
"Speculative demand shocks driven by shifts in expectation accounted for the bulk of the price increase (+14/b). Thus, any revisions in these expectations would have resulted in a sharp fall in oil prices," said Fattouh and Economou.
Noncommercial traders have consistently liquidated long positions in Nymex oil futures in the fourth quarter, which became a crowded trade in late third quarter. The Commodity Futures Trading Commission Friday afternoon reported speculators again reduced positions in oil futures through Tuesday (11/27), with noncommercial traders moving into a net-short position in ULSD futures for the first time in 17 months.
Saudi Arabia will look to stop the bleeding over the next week, with Saudi Crown Prince Mohammed bin Salman scheduled to meet Russian President Vladimir Putin at the ongoing Group of 20 international forum in Buenos Aires, Argentina, which runs through Saturday. The result of their meeting will set the tone for the Dec. 6 meeting of the Organization of the Petroleum Exporting Countries and 10 non-OPEC oil producers, with Saudi Oil Minister Khalid al-Falih proposing extending the 2016 Vienna agreement that expires in 31 days into 2019. In doing so, Saudi production would drop 1.0 million bpd to its quota 10.058 million bpd.
Global oil demand is also on the agenda at the G-20 gathering, with U.S. President Donald Trump and Chinese President Xi Jinping set to meet for dinner Saturday when they will discuss U.S. demands for changes in Chinese trade policy. It appears the two countries will arrange for a delay in escalating their trade dispute, but in the increasingly realpolitik world, traders are not expected to add speculative length, especially considering year-end book-squaring is quickly at hand.
Nymex January WTI futures settled down $0.52 at $50.93 bbl, while the spot contract erased $22.32 or 30.5% of its value in November. ICE January Brent expired down $0.80 at $58.71 bbl, while on a spot continuous basis Brent futures fell $24.01 or 29.0% this month. February Brent settled down $0.45 at $59.46 in the contango market.
Nymex December ULSD futures expire 19 points higher at $1.8455 gallon, while the spot contract lost 50.63 cents or 21.5% in value in November. January ULSD futures ended the session 1.0 cent lower at $1.8294 gallon.
NYMEX December RBOB futures settled down 1.34 cents at $1.4413 gallon, with the spot contract down 65.99 cents or 31.4% from Oct. 31. January RBOB futures settled 2.8 cents lower at $1.4019 gallon.
Brian L. Milne can be reached at email@example.com
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