By Ole Hansen, Head of Commodity Strategy at Saxo Bank
Continued focus on oversupply ahead of the December 4 OPEC meeting kept oil under pressure, industrial metals received a boost from talk of Chinese production cutbacks while a rising dollar added further misery for precious metals.
The dollar continued its ascent and against the euro and touched its highest level since April. Traders both speculative and real money have been slow in jumping back on the long dollar train. However, speculation about additional stimulus being announced by the European Central Bank on December 3 in addition to the expected US rate hike on December 16, mean a continued rally into year-end seems increasingly likely.
WTI crude oil has settled into a $40 to $44 range with supply news continuing to limit the upside for now. US weekly inventories rose for a ninth straight week while Libya's attempt to reopen two of its biggest fields could lead to a doubling of its current production to 800,000 barrels per day.
On December 4 OPEC meets in Vienna for the first time since October (when they held a technical meeting) and multiple issues will be discussed on and off the official agenda. Since October the price of OPEC's crude oil basket has fallen by another 10 percent to the lowest since the 2009 recession.
Non-Opec supply, meanwhile, remains stubbornly high with US production having plateaued above 9 million barrels per day. A continued drop in the number of oil rigs operating across the US should however provide some comfort in the belief that additional production cuts will be seen during the coming months.
US oil production has stabilised but the continued drop in number of oil rigs should eventually trigger a renewed decline
Saudi Arabia, the architect of the current strategy of pump and dump, has received increased criticism from within the cartel. Not least from its poorer members who are all suffering from dwindling income and the inability to increase production any further. Saudi officials have been seen changing their tone in recent statements and the latest which highlighted its desire to work with other producers to ensure price stability have sparked speculation about a surprise announcement next Friday.
The value of OPEC's daily production has slumped by $2 billion per day compared with the average seen between 2011 and 2014. So while OPEC can claim success in terms of stimulating global demand the negative economic impact on its members has been tremendous.
However, changing course at this stage when non-OPEC production remain stubbornly high should ensure a no change decision as anything else could be viewed as an unwelcome defeat to Saudi Arabia. Discussions about how to handle next year's production increase from Iran, and the potential doubling of output from Libya within weeks, will undoubtedly lead to an interesting discussion among the ministers.
One thing is certain. Oil traders will be glued to their screens next Friday while journalists and analysts will be busy trying to decipher all the unofficial comments that are picked up outside the conference room.
The combination of a surprise announcement (however slim) and the extended short position currently seen in the futures market should keep the downside risk remaining limited to $40 for WTI and $43 for Brent ahead of the meeting. We still view the $40 to $50 area as the most likely area of trading during the coming months. However, a seasonal build in US inventories during the first quarter, combined with increased production from Libya and Iran, will keep the short-term risk skewed to the downside.