Oil Scenarios on US-Iran Tension
Brent has been stuck in a compressed $60-63/bbl range since its rally from the late December abyss, historically a reliable indicator that a pop in volatility awaits.
The narrow range is counterintuitive given the multitude of macro and oil-specific variables. However, consumers are buyers at $60/bbl Brent, while a wall of producer selling sits above, putting a floor and cap on prices.
Producers are lined-up and view a potential bounce in oil prices as an opportunity to sell. The queue grows with every passing week. Nothing short of a substantial catalyst is needed for Brent to break to the key technical level of $71.5 – $72.5/bbl. A foreign policy mis-step aimed at swapping Iranian for Venezuelan barrels could be just the failed outcome needed as a catalyst …
The supply side narrative remains constructive, while consensus demand growth expectations for 2019 remain, in our view, completely unrealistic. That being said, the usual barrel-counting feels absurd to us. The market seems to be sleepwalking while there are major game-changers developing given geopolitics and macro-economic stresses ahead.
Brent has been stuck in a compressed $60-63/bbl range since its rally from the late December abyss, historically a reliable indicator that a pop in volatility awaits.
The narrow range is counterintuitive given the multitude of macro and oil-specific variables. However, consumers are buyers at $60/bbl Brent, while a wall of producer selling sits above, putting a floor and cap on prices.
Producers are lined-up and view a potential bounce in oil prices as an opportunity to sell. The queue grows with every passing week. Nothing short of a substantial catalyst is needed for Brent to break to the key technical level of $71.5 – $72.5/bbl. A foreign policy mis-step aimed at swapping Iranian for Venezuelan barrels could be just the failed outcome needed as a catalyst …
The supply side narrative remains constructive, while consensus demand growth expectations for 2019 remain, in our view, completely unrealistic. That being said, the usual barrel-counting feels absurd to us. The market seems to be sleepwalking while there are major game-changers developing given geopolitics and macro-economic stresses ahead.
Brent has been stuck in a compressed $60-63/bbl range since its rally from the late December abyss, historically a reliable indicator that a pop in volatility awaits.
The narrow range is counterintuitive given the multitude of macro and oil-specific variables. However, consumers are buyers at $60/bbl Brent, while a wall of producer selling sits above, putting a floor and cap on prices.
Producers are lined-up and view a potential bounce in oil prices as an opportunity to sell. The queue grows with every passing week. Nothing short of a substantial catalyst is needed for Brent to break to the key technical level of $71.5 – $72.5/bbl. A foreign policy mis-step aimed at swapping Iranian for Venezuelan barrels could be just the failed outcome needed as a catalyst …
The supply side narrative remains constructive, while consensus demand growth expectations for 2019 remain, in our view, completely unrealistic. That being said, the usual barrel-counting feels absurd to us. The market seems to be sleepwalking while there are major game-changers developing given geopolitics and macro-economic stresses ahead.
2018 saw a brutal swing in sentiment that has left the oil market with a nasty hang over into year-end.
The latest move lower has sparked industry concern, however, sentiment remains surprisingly bullish and the start of 2019 will be critical to set the tone.
Few major market participants have been left unscathed by the uptick in oil price volatility. Oil producers are hedged but well below year ago levels; market makers such as banks, were hit by “negative gamma” as oil prices crossed through put strikes subsequently sold to producers; Investors were caught off guard by the magnitude and the swiftness of the sell-off in prices and spike in volatility; while trade houses suffered from a lack of trading opportunities outside of physical arbs in the US. Overall, 2018 was a year to forget for most in the oil market.
Where to from here and what are the signals we are monitoring for oil producers in 2019?
The market setup is at a critical juncture with both the G20 this weekend and the OPEC meeting on Dec 6th. The outcome will be decisive for the direction of oil prices.
Here are our scenarios on what to expect
We can send our thanks to President Trump for triggering the recent round trip to $86 bbl and back to $70/bbl. Increased production from OPEC+ to offset “Iran exports to zero”, a last minute policy shift on waivers for Iran barrels and “verbal management” lower has had its toll on the oil market.
Mid-term elections are over, with “the job now done”, leaving OPEC+ on the back foot to manage damage control ahead of the 6th Dec OPEC meeting in Vienna.
Looking at the shift in the oil forward curve, it is no wonder Saudi Arabia is trying to contain the situation by raising OSP’s to the US (the most visible barrels) and by announcing a 500 kbd cut for December. OPEC+ producers are selling into a contango spot market, whilst (commercial) independent oil producers can hedge ~$70 bbl.
This is exactly what OPEC+ doesn’t want !
*For detailed analysis on CTC’s Brent-linked hedging portfolio survey, please contact us.
We attended the 39th annual Oil & Money Conference in London this past week as well as the Energy Intelligence’s Petroleum Executive of the Year, with BP’s Bob Dudley receiving the honour.
Our key takeaway: A sentiment shift away from “the Saudi put” to limited OPEC+ spare production capacity. Measuring “barrels at risk” is now combined with “explosive” language and actions from hard line US foreign policy. The result is a steep geopolitical premium for Brent.
Oil producers are key beneficiaries from the unfolding paradigm shift with some of the best value opportunities for hedging that we have seen in a number of years. Strong consumer buying and increasing investor flow is driving short-term momentum and supporting the back end of Brent curve.
Still, discipline must remain, as we see risks ahead that are not reflected in current Brent prices (especially 2H 2019). The bull case has become consensus, focused entirely on supply. These disruptions may happen, but the constructive narrative for oil holds true only if the extrapolation of demand growth materialises.
Trade wars, rising interest rates, Chinese renminbi weakness and global macro deterioration have a greater risk of ruining the “bull party”, than what is currently discounted in oil prices.
The physical has clearly tightened, reinforcing the bullish narrative on geopolitical and supply risks for Brent.
Consumer buying appears insatiable and is pushing backend prices to 3-year highs while increased investor flow is driving short-term momentum higher. Importantly, any let up in consumer buying of deferred oil should be viewed as a signal for producers to accelerate hedging programs.
Oil supply is tracked in quasi real-time, where the feedback loop on oil prices is immediate. Tracking demand, though, can be an art rather than a science. Less transparency means inflection points on demand flow through to the market with a lag.
With Brent at an all-time high in emerging market currencies, the market is not factoring enough downside risks to 2019 oil demand forecasts (our view for 2019 is deteriorating week on week).
*Contact us for detailed analysis on CTC’s Brent-linked hedging survey
Supply disruptions, trade wars and falling OPEC share capacity dominate the headlines but as the oil market settles in for the summer lull the growing disconnect between physical and paper markets and complacency on consensus 2H 2018 and 2019 demand growth forecasts are the 2 key variables that keep us awake at night.
CTC’s survey on the Brent-linked hedging portfolios of ~30 upstream companies is currently available with an in depth look at hedging instruments, hedge book maturity, average protection levels, peer benchmarking and analysis on hedging flow volumes. Please contact CTC for more details.
Supply disruptions, trade wars and falling OPEC share capacity dominate the headlines but as the oil market settles in for the summer lull the growing disconnect between physical and paper markets and complacency on consensus 2H 2018 and 2019 demand growth forecasts are the 2 key variables that keep us awake at night.
CTC’s survey on the Brent-linked hedging portfolios of ~30 upstream companies is currently available with an in depth look at hedging instruments, hedge book maturity, average protection levels, peer benchmarking and analysis on hedging flow volumes. Please contact CTC for more details.
All numbers on potential OPEC production increases have by now been thrown around: Up to 1.5 mb/d release last week, down to the now consensus 300 – 600 kb/d latest to hit the tape.
The market knows that OPEC+ are in a situation where nearby weakness in the physical market is expected to quickly tighten in 2H. Oil is now quickly becoming a political commodity and cracks may be appearing in the cartel.
In Brent, investors are still massively setup for a gradual increase in OPEC production and higher prices into 2H 2018.
In this report we look at the outcomes of the OPEC meeting and share our trading views.