Crude oil prices got greased on concerns about OPEC compliance and the rebalancing of the S&P GSCI index. Record December production by Iraq raised concerns that the country would not be able to reign in production even as they swear they will.

Yet the selling was exasperated on reports that the S&P GSCI (Goldman Sachs Commodity Index) is reducing its exposure to energy to the lowest level since 1999 in its annual rebalancing that began yesterday. Jodie M. Ginsberg is Global Head of Commodities and Real Assets at S&P Dow Jones Indices and reported that the index began to adjust the commodity weights in the index to their 2017 target weights yesterday and over the next five days and plans on reducing its exposure to energy. While energy will remain the biggest sector in the commodity index targeting 56.2%, it will be a significant decrease from its 2016 target weight of 63.1% and ending weight on Jan, 6. 2017 of 62.2%. In fact, it is the lowest target weight for energy since 1999, driving $600 million of energy outflows for every $10 billion tracked per S&P Dow Jones Indices. So, the process of reducing positions in the index added more selling pressure than normal thus explaining why the market had a bigger sell-off than what was in the recent normal expected range.

The rebalancing also added more selling pressure to natural gas and products and there could be more selling pressure at times as they look to continue to reduce exposure to energy throughout the week. Commodity indexes usually sell the commodity sector that outperformed and move money back into other commodities that may have underperformed so the rebalancing may help support metals and grains. One would hope that they got the bulk of the rebalancing yesterday but we may see more of this week. 

Iraq is the biggest worry for compliance monitors watching the OPEC deal. Reuters is reporting that Iraq plans to raise crude exports from its southern port of Basra to an all-time high in February, keeping exports high even as OPEC production cuts take effect this month. The country's State Oil Marketing Company (SOMO) plans to export 3.641 million barrels per day (bpd) of crude in February, per trade sources and preliminary loading schedules obtained by Thomson Reuters on Tuesday, potentially beating a record of 3.51 million bpd set in December. The February volume includes 2.748 million bpd of Basra Light and 893,000 bpd of Basra Heavy, the documents showed.

This is a reason why countries may want to discuss cutting exports and not just production as they meet in Vienna Jan. 21-22. They will discuss the mechanism to monitor compliance and to perhaps work on adjusting exports. There is still concerns about market share. Still, even with Iraq’s lofty export goals the rest of the cartel is staying in line. Russia also is reporting that they are reducing their production in line with agreed upon cuts and that should get the market in line.

Oil traders will also get the API supply report tonight and most are looking for a rebound from last week’s big drop. We want to use the weakness caused by New Year rebalancing. We expect better than expected compliance by OPEC and we think the warm weather impact on natural gas has been overdone. Call for strategies.