They met; they cut; and the market paid no attention. OPEC day turned out to be an underwhelming affair if the price action is anything to go by. Indeed, the two leading crude markers ended the session little changed. This is in spite of the fact that the OPEC+ producer alliance is bracing for deeper supply cuts. The six-hour long OPEC meeting was preceded by a gathering of the technical committee in which they recommended an additional cut of 500,000 bpd in 1Q2020. These fresh cuts are expected to be formally agreed by OPEC’s non-OPEC partners when they meet later today.

It is fair to say that this agreement has left market players with mixed feelings. On the one hand, the extent of these extra supply curbs surprised to the upside. On the other hand, there is concern that there was no mention of an extension to cuts beyond the current March 2020 deadline. Even so, the key takeaway is that the first quarter of next year looks a lot more supportive. OPEC expects the call on its crude to average 29.13 mbpd in 1Q2020, around 500,000 bpd below current production levels. Now though, the additional cuts should result in a balanced market in the coming quarter, assuming OPEC+ conforms with the new pact.

OPEC – or more specifically Saudi Arabia – is clearly determined to avert a price slump and the return of a supply glut. Its latest efforts to limit production represent a positive signal for the oil market but also for next week’s Aramco listing. The long-awaited IPO was yesterday priced at the top end of its indicative range, raising $25.6 billion in the world’s biggest stock market flotation. This values Saudi Arabia’s giant state-owned oil monopoly at $1.7 trillion, slightly below its initial lofty expectations. That said, the OPEC kingpin now has an added incentive to safeguard a positive price backdrop. Its decision to push ahead with more output cuts is a step in the right direction. Nevertheless, it will need to prolong curbs throughout next year if it is to put oil prices onto a northerly trajectory.

Prices up, volumes down

By most accounts, November was a positive month for the energy complex. Price gains were registered across the board amid a fresh bout of trade optimism. Brent led the way with a monthly advance of 3.6% while WTI followed suit with a 1.8% increase. A further boon for the US crude marker came as its front-month spread shifted into backwardation. Yet this display of strength was missing in one key domain, namely trading activity. Volumes were subdued last month when compared to the year-to-date period and November 2018.

ICE Brent average daily volumes (ADV) came in at 813,152 lots per day (lpd) last month, a 21% drop from November 2018 and the second lowest monthly average of 2019. The pullback in trading activity was even more pronounced on the US crude benchmark. ADV on CME WTI eased to 953,639 lpd last month, a 27% decline from a year earlier and the lowest since August 2018.

The fact that WTI experienced a deeper trading lull than its European counterpart is somewhat puzzling. This is because it outperformed ICE Brent on several key measures of price volatility. For instance, the average daily front-month price swing on CME WTI last month was $1.59/bbl, slightly ahead of the $1.50/bbl on ICE Brent. Similarly, the average daily change in absolute terms over the same period on the former was a slightly more heightened 87 cts/bbl when compared to 73 cts/bbl on the latter.

Meanwhile, another head-scratcher comes courtesy of the investing fraternity. Financial speculators were far more vigorous in rebalancing their CME WTI portfolios last month. Bullish bets on CME WTI rose by 95 million bbls or 89% in the four weeks to November 26. At the same time, net length on ICE Brent increased by a far more modest 37%. What is more, the average weekly swing in CME WTI net speculative length in absolute terms stood at 33 million bbls over the aforementioned period. This compares favourably to 24 million bbls on ICE Brent. All in all, this flurry of speculative repositioning should have acted as a boon for CME Brent ADV yet the impact was relatively muted.

The same is true of the hedging community. US shale players have in the past failed to bolster their price-protection strategies yet their enthusiasm was on full display last month. Producers jumped at the opportunity to lock in future revenues as US crude prices approached $60/bbl. Gross shorts held by producers and merchants in CME WTI jumped by 52 million bbls in the four weeks to November 26 to the highest since mid-May. This should have acted as a lifeline for WTI trading volumes. In any case, the upswing in hedging practices will help safeguard cash flows and support future US production growth rates. In turn, this should go a long way to underpinning demand for WTI futures contracts in the coming months. That said, there is no guarantee that the US crude benchmark will stay atop of the futures volumes league table. Trading volumes will be at the mercy of OPEC production strategy and the US-China trade war in the near-term, both of which have a greater bearing on the more-geopolitically- sensitive Brent benchmark.