Oil prices fell more than 4% today, dropping to their lowest level in three years. This decline comes as trader sentiment worsens ahead of tonight’s highly anticipated U.S. Presidential debate between Donald Trump and Kamala Harris. Traders are reacting strongly to negative news while overlooking otherwise strong fundamentals.
Hedge funds and money managers are currently the most pessimistic about crude oil since the CFTC began publishing market positioning data. Speculative positions in crude oil are extremely short, with Brent and WTI net long positions totaling just 139,242 lots as of the week ending September 3. This equates to only 2.3% of open interest, the lowest level since early 2011 and 2 percentage points below the pandemic-era low. Net selling over the past week reached 108.8 million barrels, bringing the total net selling over the past eight weeks to 311.2 million barrels. Standard Chartered’s proprietary crude oil positioning index has also fallen to -100.0 for the first time this year, though it previously reached this level in December 2023, which was followed by a sharp rally. Analysts note, however, that the index reached -100.0 three times in Q2 2023, and prices only bottomed out a week after the third occurrence, indicating further potential for net selling. ICE Brent’s positioning is notably weak at -93.9, but NYMEX WTI is somewhat better at -51.8, with its speculative long-short ratio remaining above historical lows.
According to StanChart, the extreme positioning in crude oil is driven by incorrect expectations of a looming surplus and persistent economic fears. While oil markets are slow to react to actual fundamentals, the current positioning could lead to upside price risks.
The latest Energy Information Administration (EIA) data shows no evidence of an imminent economic downturn. The main negatives were an unexpected rise in gasoline inventories and week-over-week decreases in implied demand. However, crude oil showed a favorable -1.816 million barrels per day flow balance.
OPEC+ Postpones Production Increase
In a key development, the OPEC+ alliance has decided to delay plans to increase production by 180,000 barrels per day in October. This is part of a broader plan to gradually return 2.2 million barrels per day to the market over the coming months. The reduction of 2.2 million barrels per day, which was implemented during the second and third quarters, was set to end this month. The voluntary reductions, which include contributions from Saudi Arabia, the UAE, Russia, Iraq, Kazakhstan, Kuwait, Oman, and Algeria, did not generate much momentum, and oil prices fell back below $70 a barrel. Ben Luckock, global head of oil at Trafigura, noted that the OPEC+ announcement failed to excite the market due to a bleak outlook for oil balances. OPEC also revised its forecast for global oil demand growth, reducing next year’s projection slightly to 1.74 million barrels per day. Luckock had previously predicted that oil prices would dip into the $60s due to weakening demand in China.
Even the removal of 700,000 barrels per day from the market has not revived oil prices. Libya’s oil exports remain halted due to the Haftar clan’s actions aimed at gaining leverage in a struggle over the Central Bank. While some production has resumed to address local power needs, Libyan crude output has significantly declined from 1.15 million barrels per day in July to around 230,000 barrels per day. Despite this, prices for some crude oil grades, including Azeri and African oils, have increased as refiners seek alternatives. August saw a 24% rise in European imports of WTI Midland, partly due to Libyan disruptions. The price difference between WTI Midland and WTI has widened to 80 cents per barrel from 60 cents before the Libyan shutdown.
Gulf of Mexico Production Affected by Tropical Storm
Tropical Storm Francine, expected to become a Category 1 hurricane, has led to production shutdowns in the Gulf of Mexico. The Bureau of Safety and Environmental Enforcement (BSEE) reported that personnel have been evacuated from at least 130 platforms, resulting in a production loss of 412,070 barrels of crude oil per day and 494 million cubic feet of natural gas per day, about 25% of total Gulf of Mexico production.