While oil prices have staged a slight fight back today with Brent crude futures gaining 0.45% by early morning in London, and WTI up 0.5%, Monday saw prices plummet by around 4%. Brent crude is currently trading at around $55.20 a barrel and WTI at $52.222. The market keeps swinging between optimism fueled by the majority of OPEC and the non-OPEC members who have agreed to cut production showing evidence of complying with commitments and doubt around the likes of Iraq reneging on the agreement. Increased production from exporters such as Libya, which are not part of the group that has agreed to cuts, is also weighing on the prospect of a real and sustained decline in inventories over 2017.
Analysts are also conflicted. BMI Research recently stated, as reported by Reuters: “Coordinated output cuts will support the market rebalancing that will draw down global stock levels, leading us to revise up our Brent crude forecast for 2017 to $57 per barrel."
However, evidence is mounting that hedge funds are losing faith in sustained prices of over $56 a barrel. Recent exchange and regulatory data show a marked slow down in long positions on oil price and gathering momentum for short positions. Other analysts are starting to make braver assertions that the rise in oil prices seen since December’s OPEC agreement will not last. The FT quotes SEB chief commodities analyst Bjarne Schieldrop as asserting “Brent crude (is) probably going to trade sub $54 a barrel”.
A January 9th article by Art Berman in Forbes also takes the position that oil prices will not move towards $60 in 2017 and will, at best, hold around the $55 level with the agreed production cuts doing no more than putting a floor under oil prices, preventing them heading south of $50. Berman posits that even if the OPEC and non-OPEC cuts are honoured completely it will take a year before inventory levels are depleted to a great enough extent to push oil price beyond its current levels. And any failure for the entirety of promised cuts to stick, or rising production elsewhere, will mean oil prices lower than those at present for the foreseeable future.
Berman believes that OPEC’s agreed production cuts were more a strategy to prevent oil prices heading back towards $30 and that the cartel still remembers that its output cuts in the early eighties did little to impact global supplies and merely cost it market share and revenue. Another major factor, according to Berman, is that OPEC had no choice, with 2016 production levels unsustainable due to commercial reserve limits having reached capacity.
Gold price, meanwhile, continued gains into today with spot gold up 0.5% to $1,187.01 oz by the end of the Asian trading session. The move up to a month-high was fueled by a weakening dollar and hard-Brexit concerns. U.S. gold futures moved up by to 0.2% to $1.187.20 oz.
Hedge fund activity was also under scrutiny with regards gold price with a Bloomberg survey suggesting that the evidence points to funds not buying into a sustained gold rally. Big speculators have been taking short positions on gold to such an extent that currently the net bearish position is at its highest level since January last year.