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OPEC Upgrades Demand for its Oil. Would that Affect Output Cut Decision? Print E-mail
ONG Focus | Insights | Written by Oil N' Gold | Tue Nov 14 17 01:53 ET

Oil prices take a breather after recent rally has taken both benchmarks to the highest level in over two years. The current reason for profit-taking is surging US shale production which might offset the efforts of further OPEC/ non-OPEC cut. At the time of writing this report, the front-month WTI contract is trading at 56.63, down -0.25% from Monday's close. The Brent contract is currently hovering around 62.95, slipping another -0.32%, after a -0.57% drop on Monday. Precious metals were higher, with the exception of palladium. The benchmark Comex gold contract added +0.39% and the silver contract was up +1.06%. in the FX market, US dollar was generally higher against major currencies. British pound was the weakest performer losing -0.82% against the greenback. As we mentioned on the prior day, heightening political instability and ongoing Brexit uncertainty have been weighing on the currency. US yield curve flattens again as the market prices in higher chance for a Fed funds rate hike in December. While 2-year yields added +3 points to 1.687%, US 10-year yields stayed flat at 2.4%.

Energy Market

The EIA estimated that US shale production would rise for a 12th month, up +0.08M bpd to 3.17M bpd, in December. Meanwhile, natural gas production probably rose to a record high of 61.7bcf/day in December. On the other hand, the OPEC continues to affirm that its output cut efforts are effective and that global demand should be able to absorb supply. At its monthly report, the cartel has revised higher the demand forecasts for its oil by +0.2M bpd and +0.4M bpd for this year and 2018 respectively. OPEC has noted that previous output cuts "have clearly played a key role in supporting stability in the oil market and placing it on a more sustainable path". The cartel, together with some non-OPEC producers, would discuss about "how best to continue these efforts in the coming year". OPEC and non-OPEC producers are scheduled to meet o November 30. The market has widely expected the producers are keen to extend the output cut deal which should expire in March 2018. Would the upgrade in the demand for OPEC's oil deter the members from extending the deal? Is such an upgrade pave the way for further increase in production by Libya and Nigeria, both are currently exempted from the deal? We suggest gauging comments from various OPEC members in coming weeks to get a sense of what they intend to do at the meeting.


China's retail sales surprised to the downside in October. The year-over-year +10% growth recorded came in weaker than consensus of +10.5% as expected and September's +10.3%. Industrial production expanded +6.2% y/y in October, in line with expectations but moderating form +6.6% in September. Urban fixed asset investment rose +7.3%, in line with consensus and constituting the recent deceleration in growth.

For the rest of the day, Headline CPI in the UK probably accelerated to +3.1% y/y in October from +3% a month ago. Core CPI might have rose ot +2.8% y/y from +2.7% in September. Meanwhile, RPI might have accelerated to +4.1% y/y from +3.9% in September. PPI inflation is expected to have slowed down in the month. In the Eurozone, GDP growth for Germany, the region's biggest economy, probably stayed unchanged at +0.6% q/q in 3Q17. GDP growth for the region as a whole might have also stayed at 0.6% q/q in 3Q17. Headline CPI might have stayed unrevised at +1.6% y/y in October. On ZEW's survey, German economic sentiment index probably climbed +1.9 points higher to 19.5, while the current situation index edged +1 point higher to 88, in November. In the US, PPI might have eased to 2.3% y/y in October from +2.6% a month ago. The core reading probably stayed unchanged at +2.2%.

Commitments of Traders

Speculators were bullish over the energy complex in the week ended November 7. Net LENGTH for crude oil futures rose +72 257 contracts from a week ago to 545 206. NET LENGTH of heating oil increased +3 013 contracts to 59 638 while net LENGTH for gasoline soared +6 321 contracts to 83 415. Net SHORT for natural gas fell -16 691 contracts to 85 396 for the week.

Speculators were also bullish over the precious metal complex last week. Net LENGTH for gold gained +2 695 contracts to 195 790, while that for silver futures rose +8 750 contracts to 68 902. For PGMs, net LENGTH for platinum added +2 592 contracts to 22 204 while that for palladium rose +1 441contracts to 22 788.


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