Brent crude ticked up by 40 cents to $55.63 as markets were about to open in London this morning, a gain of 0.72%. WTI was up 0.76%, also 40 cents, to $53.15 a barrel. OPEC released an announcement on Sunday that 1.5 million bpd of the 1.8 million bpd target cut in output, which officially came into force on January 1st, has already been implemented. Iraq’s oil minister further confirmed on Monday this his own country was on track to meet its output reduction commitments.
More importantly, inventories data released by Bernstein Energy showed that global oil inventories showed a 24 million-barrel decline over Q4 2016. In a note to clients Bernstein informed:
"This is the biggest quarterly decline since the fourth quarter of 2013, confirming that inventory builds are now reversing as the market shifts from oversupply to undersupply”.
Balancing out optimism that OPEC cuts are both being complied with and starting to bite into global supplies is increasing output in the U.S., which is up 6% in the past six months and continuing to expand as new rigs are added at pace. While there will be a lag before increased U.S. oil output is apparent in inventories, there is little doubt that it will reduce to a significant extent the impact of the cuts made by OPEC and its partners in the pact.
A report by the Financial Times on Monday indicated that hedge funds are showing faith that OPEC’s supply cuts will help push the price of oil further up this year. The report states that long positions held by hedge funds on oil price are at an all-time record level. The downside could come if hedge funds are too fully invested already to push prices higher or have a reversal of sentiment at any point and decide to start taking profits, with prices currently 20% up on where they were in November.
While there is currently faith that OPEC’s cuts will push prices up from their current levels in the first half of the year the bull run could rapidly reverse if U.S. producers up output enough to concern hedge funds over their long positions and provoke mass profit taking.
With the U.S. dollar strengthening this morning from 7-week lows, gold has gone in the reverse direction and retreated from its 2-month high position. During the U.S. session yesterday, gold saw some further gains as Trump began to implement a number of protectionist policies with the withdrawal from the unratified Trans-Pacific Partnership. He also stated that he would renegotiate the North American Free Trade Agreement between the U.S., Canada and Mexico, in place since 2004, and impose a significant border tax on goods coming into the country. Market concerns that protectionist policies from Trump will hit global trade pushed gold up to $1,219.59, its highest level since November 22nd.
However, with the USD subsequently rebounding, gold has also slid and was down 0.3% to $1,214.2 oz., pre-open in London this morning.