Oil Falls to 1-Month Low as Signs of Another Slump Build

Monday marks another week in which market slumps reflect analysts' skepticism about anything productive emerging from the Organization of the Petroleum Exporting Countries (OPEC) deal to curb output: Brent dropped 2.8 percent to settle at $48.32 per barrel, while West Texas Intermediate settled down 3.8 percent, or $46.86 – the lowest closes since September 28 and 27, respectively.

However, while the recent general consensus has been that prices will soon escalate regardless of what happens to the OPEC deal when members convene later this month in Vienna, data from energy monitoring service Genscape shows a build of 585,217 barrels of crude at the storage hub and delivery point for WTI futures in Cushing, in the week to October 28.

Another sign that the market is headed for bearish territory comes courtesy of the U.S. Commodity Futures Trading Commission, which reports that money managers cut their net long U.S. crude futures and options positions for the first time in five weeks in the week ended Oct. 25.

And while critics generally deride both OPEC and its deal for being ineffective, many of them agree that the hype surrounding a proposed oil cutback is enough to cause chaos should the deal go south as many predict: "Right now it's not looking good but these things always go right down to the wire," says Mike Wittner, head of oil-market research at Societe Generale, adding: "There's an awful lot at stake here. If they don't reach an agreement oil will fall like a rock and be testing $40 in no time."

Still, in a market where reason is routinely trumped by sentiment and almost nothing can be predicted with any degree of certainty, cautiously optimistic voices still abound, one of them being John Kemp, market analyst for Reuters, who conceded in a column published Monday that, "The speculative community has now shifted from being very short on the eve of the OPEC meeting to being very long."

However, he dismissed commentators who blame the recent fall in prices on OPEC's failure to produce a detailed oil production curtailment plan in a timely fashion: "In truth, once prices stopped climbing, it was always likely some hedge funds would take profits and reduce their long positions, creating self-fulfilling downward pressure on prices."

Kemp concluded that the hedge fund community still has a strong bullish bias towards oil on the expectation the supply-demand balance will tighten and lift prices during 2017: "But with so much bullishness already priced in and hedge funds already very long, many fund managers are becoming cautious until OPEC spells out how the output agreement will work."

It's anyone's guess what will happen in Vienna, but preliminary signs don't look good, with Indonesia recently joining Iraq, Iran, Nigeria, and Libya in the growing list of OPEC members who have either directly or indirectly shown no interest in following the cartel's loose objective of limiting production to a range of 32.5 million to 33.0 million barrels per day.