On November 30, 2016, OPEC and non-OPEC oil producers agreed to production cuts of 1.8 million barrels per day, hoping that this action would bring the market back in balance and prices would rise. And rise they did, from around $49.44 per barrel on the announcement date to nearly $54.50 on February 23, 2017. It seemed that OPEC was on the right track and that train was headed for $60 in the near future.
Market participants began betting on higher prices, buying futures contracts and higher prices became a reality very quickly. Both the CME Group and Intercontinental exchange noncommercial net long positions grew to record levels. However over the last 10 days, a long liquidation has begun, net length positions have declined and the market has fallen below the pre-production cut levels. What happened and where do we go from here?
Ahead of the January 1, 2017 implementation date, in December, producers sold and shipped as much crude oil as they could, and those shipments showed up at their customers doorsteps over the next two months. This occurred at the same time that refiners, especially in the U.S., began reducing their crude processing rates as the spring maintenance season got underway.
According to the Energy Information Administration, refining utilization dropped from about 91 percent in December 2016 to just over 85 percent in the week ending March 10. This represented a decline in oil demand of 1 million barrels per day. Not only that, the Strategic Petroleum Reserve has recently conducted two sales, totaling 16 million barrels of oil, which began hitting the market at the end of February and into early March.