Futures File

December 2, 2016

Oil Booms on OPEC Cuts

After months of wrangling, the Organization of the Petroleum Exporting Countries (OPEC) announced that its members had agreed to collectively reduce oil output by 1.2 million barrels per day (-3.6%).

This announcement, made early Wednesday morning, started the biggest one-day rally in nearly a year and rocketed prices back over $51 per barrel.

Despite the market’s initial reaction, some are skeptical that the individual countries will each follow through with their promise to cut; the incentive to “cheat” and produce at higher levels has frequently led to overproduction in the past. Even if the OPEC members follow through with their plan, the global oil supply may not change significantly, as U.S. producers may increase production to capture higher prices.

Hence, prices could stay stuck near current values unless there is a major shift in global supplies or demand.

 

Gas Heats up

Alongside the petroleum rally, natural gas exploded higher this week, nearing a two-year high.

U.S. natural gas production soared over the last decade as new technologies made drilling much easier, which ultimately led to a record glut of the fuel that the market is still trying to work off.

Over the last few years, the glut and ensuing low prices have been welcomed by domestic consumers, including home heaters, electricity generators, and chemical producers, but the demand couldn’t match rising production.

As a result, there has been a move to convert natural gas into a liquefied fuel that can be exported, a booming industry that has begun soaking up the excess gas. During November, the US became a net exporter of natural gas for the first time in almost 60 years, an extraordinary sign of the changing face of the global energy markets.

While Friday’s price of $3.50 per million British thermal units is a relatively high value domestically, exporters are hoping to capture much higher prices in international markets, like Korea and Japan, where natural gas is worth over $7.00 per MMBtu.

 

Wheat Market Wanes

Wheat prices withered lower this week, with March futures contracts hitting new lows. Prices are falling as the market tries to absorb bin-busting crops from Australia, Russia, and Canada, three of the world’s largest wheat exporters.

Despite the bearish outlook, some long-term traders are seeing prices near $4.00 per bushel as an opportunity. Many farmers have reduced wheat acreage this year, and poor growing conditions over the U.S. winter could create a shortfall, potentially sparking a rally.

For over 18 years, Walt taught his method of trading at Purdue University. His comments on the markets have been featured in USA Today and other national outlets.

Walt's weekly commentary has been published for nearly 25 years. Futures File, written on Fridays for Saturday publication, provides a brief summary of commodity futures market highlights for the week.