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Weekly Fundamentals - Resurgence of Middle East Tensions Support Oil Prices Print E-mail
ONG Focus | Insights | Written by Oil N' Gold | Sun Nov 12 17 00:47 ET

It was a choppy week for the oil market. While a pullback is justified after weeks of relentless rally, several evolving events have the potential to drive prices further higher. Look as crude oil prices, both benchmarks retreated earlier in the week on profit-taking. Buying interests resumed in the middle of the week as Middle East tensions showed signs of intensification. Prices weakened again on Friday as a report showed that US oil rigs jumped significantly. On net, both crude oil benchmarks extended the rally for a fifth week, with the front-month WTI and Brent contracts gaining +1.98% and +2.34% respectively. Over the past five weeks, the WTI and Brent contracts have risen +14.3% and +13.5% respectively.

November OPEC/ non-OPEC Meeting

As we have mentioned last week, the market has priced in an announcement of output cut extension at the upcoming OPEC/ non-OPEC meeting on November 30. Traders have also relied on the words of Saudi Arabia's crown prince Mohammed bin Salman in justifying their beliefs. Bin Salman has more than once expressed his support for curbing oil production further. Back in October, he indicated the "of course" wanted to extend the cuts into 2018 as there is a need "to continue stabilizing the market". His hardliner approach in the corruption crackdown in the Kingdom, arresting and detaining royal members and military officials have anchored the market belief that he is determined to implement what he deems "correct". However, the output cut deal involves other OPEC members and other non-OPEC producers, not Saudi Arabia alone. Consensus is needed for the extension of output cut. Our baseline remains eventual output cut extension for another nine months as another oil giant, Russia, has also hinted the preference. Yet, whether the formal announcement would be made in November is uncertain.

Middle East Tensions

The comeback of Middle East geopolitical tensions should lend support for oil prices in the near- to medium- term. While domestic politics in Saudi Arabia has raised uncertainty in the Kingdom's oil policy, heightening of Saudi-Iran tensions has posed risks for output disruption. Following Saudi's accusation that Iran has been sponsoring Yemeni rebels in bombing the Kingdom's capital and the issuance of statement (the act was followed by UAE and Kuwait) calling its citizens not to travel to Lebanon, The Saudi-led coalition bombed the Defence Ministry in Yemen's capital Sanaa last Friday. Meanwhile, the UAE over the weekend indicated that militants guided by Iran hit its state-owned oil pipeline. Worries over military conflicts across the region have intensified. Such conflict is in addition to other tensions that are still evolving in the region, including Iraq-Kurdish conflict, Venezuela's crisis and Trump's threat to impose new sanctions against Iran.

US Output

Baker Hughes reported that US oil rigs jumped +9 units to 738 in the week ended November 10. Meanwhile, US oil production also rose to a record high of 9.62M bpd in the week ended November 3, lifting the 4-week moving average to a one-month high of 9.33M bpd. In the latest Short-term Energy Report, the EIA estimated that the US crude oil production averaged 9.3M bpd in October, down -0.09M bpd from a month ago. It noted that the output in the Gulf of Mexico averaged 1.4M bpd in October, down -0.26M bpd from September. The agency attributed the decline mostly to hurricanes. Indeed, US output probably has bottomed in early November. With operation largely back to normal in November, we would not be surprised to see higher US output in the month. The EIA projected that total US crude oil production to average 9.2M bpd for this year and 9.9M bpd for 2018, suggesting that output next year would set a new record, exceeding the 9.6M bpd set in 1970.

Natural Gas

Nymex natural gas prices jumped for a second consecutive week as cold weather is boosting demand. The EIA reported that gas storage gained +15 bcf to 3 790 bcf in the week ended November 3, from 3 775 in the previous week. Stocks were -219 bcf less than the same period last year and -71 bcf below the five-year average of 3 861 bcf. The EIA forecast that US natural gas production would average 73.4 bcf/ day in 2017, up +0.6 bcf/ day from last year. Output is expected to increase by +5.5 bcf/ day next year. Separately, Baker Hughes reported that the number of gas rigs stayed unchanged at 169 units in the week ended November 10. In terms of drilling types, directional rigs added +1 unit to 74, horizontal rigs jumped +12 units to 776 and vertical rigs dropped -4 units to 57. Together with the +9 unit increase in the number of oil rigs, the total number of rigs rose +9 units to 907 for the week.


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