A barrel of West Texas Intermediate (WTI) crude oil for March delivery fell to below $52 on the NYMEX Exchange Tuesday morning. Following four consecutive weeks of relatively large additions to U.S. commercial crude oil stocks, analysts at S&P Global Platts are forecasting a jump of 2.5 million barrels for the week ending February 3.
The price drop comes despite what should be good news for crude producers: OPEC members have stuck to their agreed-up cuts far better than at any other time in recent memory. The cartel had lopped off more than 90% of its projected cuts in the month of January, led by Saudi Arabia, which produced less than 10 million barrels a day.
Supply and demand are not the only factors affecting crude prices. The dollar continues gaining strength against euro, and oil prices, denominated in dollars, typically move in the opposite direction of the greenback.
The euro has been hit by rising yields on Greek bonds and Germany’s industrial production fell 3% month over month in December to close the year down 0.7%.
The other weight on crude prices is the net long position traders have taken in the futures markets. Non-commercial traders (i.e., managed money, including hedge funds) have a net long position of 492.7 million barrels. Including long positions on Brent crude, the net long is 885 million barrels (or 885,000 contracts of 1,000 barrels per contract).
The ratio of long to short contracts for WTI is nearly nine to one, far higher than the two to one ratio in November of last year, just before OPEC announced its production cuts.
Because producers have been willing to hedge future production there have been plenty of willing buyers as the money managers have dumped their short positions. That probably can’t go on forever, so it won’t and then the futures market will have to correct again.