Oil prices rose slightly on Wednesday, with Brent crude for November delivery increasing by 2.12% to $70.66 per barrel by 2:46 PM ET. Meanwhile, WTI crude for October delivery saw a 2.39% gain, trading at $67.32 per barrel.
The uptick in oil prices followed additional shutdowns of oil and gas operations in the Gulf of Mexico due to Hurricane Francine, which is expected to hit the Louisiana coast later Wednesday. The Bureau of Safety and Environmental Enforcement (BSEE) reported that energy companies have halted nearly 40% of oil and 50% of gas production in the Gulf as the storm approaches.
Despite this disruption, it remains uncertain whether these shutdowns will be sufficient to reverse the ongoing decline in oil prices. Hedge funds and other investors have become increasingly bearish on crude oil, with speculative positions currently at their lowest levels since the CFTC began publishing market positioning data. As of September 3, net long positions in Brent and WTI totaled just 139,242 lots, with speculative long bets representing only 2.3% of open interest, the lowest since early 2011. Over the past eight weeks, net selling has reached 311.2 million barrels.
Standard Chartered’s commodity analysts reported that the bank’s proprietary crude oil positioning index has dropped to -100.0, a record low for the year. They noted that trend-following algorithms continue to increase their short positions, with Brent settling lower on 14 of the past 20 trading days. Current market trends, they argue, are based on incorrect assumptions about a looming oil surplus and weakening economies in China, the U.S., and Europe. Traders are also overlooking the upcoming removal of additional barrels from the market.
In July, Russia, Iraq, and Kazakhstan submitted their compensation plans to OPEC for overproduced crude volumes for the first half of 2024. OPEC has stated that these overproduced volumes will be fully compensated by September 2025. Russia will reduce its output by 480,000 barrels per day (kb/d), Iraq by 1,184 kb/d, and Kazakhstan by 620 kb/d. According to Standard Chartered, these compensatory cuts will result in a 370 kb/d reduction in October, followed by reductions of 162 kb/d to 206 kb/d from November 2024 through September 2025. Standard Chartered expects these cuts, combined with recent reductions in production targets, to lower OPEC production by 530 kb/d in Q4 2024, 540 kb/d in Q1 and Q2 2025, and 560 kb/d in Q3 2025, provided all commitments are honored.
Standard Chartered believes that the market’s current assumption of no compensation reductions is incorrect, as other OPEC+ members are unlikely to overlook these issues. They point out that Saudi Arabia, in particular, is expected to enforce compliance with agreed cuts, supported by recent visits by OPEC Secretary General Haitham al Ghais to Iraq and Kazakhstan.
After visiting Baghdad, al Ghais affirmed Iraq’s commitment to market stabilization efforts, stating that Iraq had outlined concrete steps to compensate for overproduced volumes and promised to adhere fully to the agreement.
Looking ahead, Standard Chartered’s SCORPIO machine-learning tool forecasts a $3.02 per barrel increase in dated Brent for the week ending September 16. While it may take time for oil markets to react to these fundamentals, the extreme positioning has shifted price risks to the upside.