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While we’re still waiting for the RBNZ’s monetary policy decision due later this week, let’s talk about the recent declines in oil prices. More specifically, the fact that major oil players are bailing out of their long oil positions faster than you can say “crude.”

See, in the week ended March 14, hedge funds have slashed their net-long positions (the difference between bets of a price increase and a price reduction) by a record-breaking 23% to 288,774.

Meanwhile, producers and merchants have ramped up their short positions by 739,736, the highest level in a month, while net-long positions of Brent crude speculators also saw their biggest decline since November. Yikes!

Back up. What started all these anyway?

Remember that on November 30, 2016, the Organization of Petroleum Exporting Countries (OPEC) banded together with other major oil producers and agreed to cut their collective production by 1.8 million barrels per day (bpd) from January 1 to June 2017.

The deal was expected to address an oil glut and hopefully push prices higher.

And push prices it did! Thanks to optimism over the deal, speculators betting on higher prices (which resulted in a self-fulfilling scenario), and major oil consumers like China and Russia showing better economic prospects, oil prices rose from around $49.44 per barrel during the OPEC meeting to $54.50 in late February.

What turned the tides against more oil rallies?

There’s no one big event. Instead, oil started getting slippery (pun intended) due to a couple of factors:

1. Increasing doubts overseeing an extension of the deal
Why not do more of it if it works, right? Unfortunately, not all of the major players are keen on extending the deal.

While Saudi Arabia is confident that OPEC and its allies “may prolong production cuts…if the world’s crude oil inventories remain excessive,” other oil bigwigs like Russia have yet to give their thumbs up on the matter. Heck, Russian Energy Minister Alexander Novak specifically said that “it was too early to discuss an extension!”

2. Libya’s is back with more supply!
Recall that Libya was granted a pass from the deal due to militant attacks disrupting its production. But instead of recovering, Libya’s National Oil Corporation had lost control of Es Sider and Ras Lanuf – its largest and third-largest oil export terminals – which limited Libya’s production to about 600,000 bpd.

But forces loyal to Libya’s eastern-based military commander Khalifa Haftar regained control over the two ports on March 14 with an official saying that operations are expected to resume in 10 days.

3. U.S. stocks are canceling out OPEC’s production cuts
Don’t say we didn’t warn ya! While OPEC members and their allies are busy hacking at their production, Uncle Sam was busy getting efficient and reaping the benefits of higher oil prices.

Add increased efficiency to crude refiners limiting their crude processing rates during the spring season and you’ve got lower production costs and high crude oil stocks.

A Baker Hughes report showed that oil rigs have climbed for a ninth straight week last week, this time by 14. This puts the total active U.S. rigs digging for oil at an 18-month high of 631!

Meanwhile, a report from the Energy Information Administration (EIA) showed U.S. commercial crude oil inventories falling by 200,000 barrels during the week ended March 10, which just ended nine consecutive weeks of increases that put inventory levels to record highs.

In its March 7, 2017, Short Term Energy Outlook, the EIA also forecasted all-time record crude oil production in the U.S. of 9.7 million barrels per day in 2018, up 800,000 barrels per day from 2016 levels. Yowza!

4. Oil is just plain overbought
Another good explanation for the drop in long oil bets is that the bullpen is just plain crowded.

See, as January transitioned into February and then March, oil bulls found it harder and harder to justify further oil rallies especially when global supply is building up and chances are iffy that OPEC’s deal will get an extension.

And we all know what happens when fundamentals don’t line up with prices! If you’ve guessed the “correction,” then give yourself a pat on the back.

Brent and WTI Crude Oil Daily Charts
Brent and WTI Crude Oil Daily Charts

Does this mean that oil prices will continue to drop?

Not necessarily. Though optimism for oil remains murky, the selloff for the past couple of days has also taken the edge off from its overbought conditions.

That is, bullish bets have been reduced and prices have corrected so analysts believe that its current prices are now more “balanced” and are less susceptible to sharper corrections.

All eyes will be on the OPEC meeting in Vienna in May to see if the oil giants will have enough firepower to close another production cut deal.

Meanwhile, keep close tabs on the newswires for possible jawboning and/or insights from major oil-producing countries and their future production plans!