WTI crude gained more than 2% on Tuesday morning, erasing some of Monday’s losses, but increasingly negative sentiment in oil remains a prime risk, Oilprice said.

Oil prices were set to finish last week with a slight gain after Middle Eastern tensions helped recoup losses after US inventory data. Despite a hefty 5.5-million crude stock draw, believed to be the usual year-end clearing of inventory to minimize ad valorem inventory taxes, the immediate reaction was a slight downward correction after both gasoline and diesel posted huge stock builds. However, continued Houthi attacks in the Red Sea and a worsening Israel-Iran confrontation has limited the pricing downside, with Brent trading around $78 per barrel. 

Hedge funds and other portfolio managers ended the last week of 2023 with the most new bearish positions in futures and options contracts since March and the second-largest jump in weekly short additions since 2017. Hedge funds and other money managers are increasingly bearish on the oil markets’ outlook, adding a combined 61,000 short positions in Brent and WTI crude in the week to January 2.

This marks the largest week-on-week increase in short positions since March and the second largest since mid-2017, brushing aside ongoing Red Sea shipping woes or Libyan supply disruptions. Whilst the markets were abuzz on Saudi Arabia’s pricing cuts, the rebalancing of commodity indexes from Goldman Sachs or Bloomberg in 2024 might have had an ever bigger impact. 

The BCOM target index for WTI decreased from 7.77% to 7.36%, prompting Citigroup to assess the impact of funds exiting WTI length at around $2 billion, the equivalent of 27,000 long positions. The combined effect of hedge funds’ massive selling and Saudi Arabia cutting its February formula prices for all continents created a perfect storm for oil prices, sending WTI below $70 per barrel in intraday trading again. Both Brent and WTI have recovered since as Libya called force majeure on Sharara operations and the US dollar halted its upward surge, however weakening sentiment might prompt another downward slide this week. 

Pirate risk worsens Red Sea shipping outlook.Apart from Houthi missile attacks, the Red Sea is increasingly posing a piracy risk for shippers after a Bahrain-bound bulk carrier was boarded by pirates off the coast of Somalia, a route used by tankers as they sail to the Cape of Good Hope.

OPEC+ to meet again in February. Without Angola but desperate to project an image of cohesion and unity, OPEC+  intends to hold its first ministerial meeting of 2024 on February 1, seeking to assess the implementation of voluntary production cuts totalling 2.2 million b/d. Saudi Arabia cuts crude prices to all regions amid demand concerns. 

Saudi Aramco slashed its February-loading prices for Asian customers by $2 per barrel, bringing the price of Arab Light to the lowest level since November 2021 at $1.50 per barrel over Oman/Dubai, prompting concerns that Asian demand feels weak. Iran wants higher prices from Chinese refiners. Iran’s oil exporters are withholding shipments to China as they demand narrower discounts, with recent offers heard around $5 per barrel below Brent on a delivered basis, squeezing the supply options of Chinese “teapot” refiners. 

Protests shut down Libya’s largest oil field.Libya’s largest oil field, the 300,000 b/d capacity El Sharara, has been shut down after protestors lamenting over poor government and inadequate infrastructure took over the field, for the second time in the past six months.Libya calls force majeure on shut field. Libya’s National Oil Corporation declared a force majeure at its 300,000 b/d Sharara oilfield as ongoing protests made it impossible to carry on with normal operations, also suspending crude deliveries to Libya’s largest eastern port of Zawia.

Nigeria’s megarefinery to start test runs this week. According to Nigerian sources, Nigeria’s  650,000 b/d Dangote refinery could begin test runs as early as this week after receiving six crude cargoes from the country’s offshore fields, aiming to reach full capacity refining by year-end.

US oil M&A deals still not over. US oil producer APA Corp agreed to buy shale peer Callon Petroleum in an all-stock transaction valued at $4.5 billion including debt, adding some 145,000 acres in West Texas and New Mexico as APA boosts its US upstream operations. Chesapeake set to seal next major M&A deal. Following last month’s Occidental-CrownRock deal, the merger of US natural gas producers Chesapeake Energy and Southwestern Energy is reportedly entering its final phase to create a $17 billion shale gas champion. 

US Supreme Court dismisses case of oil majors. The US Supreme Court declined to hear the case of ExxonMobil, Koch Industries and the American Petroleum Institute, deciding that lawsuits over the oil industry’s “deceptive” actions vis-à-vis climate science should be heard in state courts. 

Leaking Gulf of Mexico Pipeline Remains Shut. The million-gallon oil spill from the Main Pass Oil Gathering pipeline in November remains a mystery as investigators still failed to discover the subsea source of leakage, keeping some 61,000 b/d of oil production in the Gulf of Mexico shut.

Venezuela unable to lift production soon. Venezuela’s Oil Ministry reported that oil production in the country rose slightly to 802,000 b/d in December, underperforming the 1 million b/d year-end target set by President Maduro as output remains lower than in the summer months, despite the lifting of sanctions.

Mexico downplays new refinery’s impact.Following years of project overruns, Mexico’s national oil firm Pemex stated its long-awaited Olmeca refinery will process 243,000 b/d of crude in 2024, suggesting the 340,000 b/d plant built in AMLO’s hometown will only reach full capacity in 2025.