By: Spencer Israel
A report from Reuters that OPEC would consider a more extensive oil supply cut sent oil futures rallying to its highest levels in two weeks on Tuesday, providing the market more clarity on what the group plans on discussing at their meeting in December.
The group is apparently worried about the impact of the U.S. and China trade war on global crude prices. OPEC, along with a group of non-members including Russia and Mexico, had previously agreed to reduce oil production by 1.2 million barrels per day until March 2020. Though Iran, Libya, and Venezuela were exempted from that agreement, the sources said Saudi Arabia would want to make sure all member nations commit to lowering production before more cuts are instituted.
The cuts were meant to stabilize the price of oil, and it worked until about one year ago. From the time the cuts began at the start of 2017 to October 2018, the price of Brent Crude oil rose approximately 43% while West Texas Intermediate increased 55%.
But that sentiment has turned. In the last 12 months Brent and WTI have fallen 30% and 23% respectively, as concerns over weakening global demand have tempered 2020 forecasts and weighed heavily on markets. Even the mid-September rally in oil was short-lived. Despite a 15% overnight rally after a drone strike at a Saudi Aramco facility knocked out 5% of global output, oil was back at its pre-attack levels within one week.
Not helping matters is the continued production stateside, as U.S. shale inventories recently hit 9.28 million barrels after rising for five straight weeks. And between that oversupply and softening demand, traders are taking notice.
According to the CFTC, bearish crude contracts outnumbered bullish crude contracts by over 86,000 the week of Oct. 15, marking the most bearish turn for oil futures since January.
OPEC leaders will be discussing all of this when they meet in Vienna from Dec. 5-6. The cartel will have to find another lever to pull if they want to keep oil markets stabilized. And the clock is ticking.
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