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.

Geo-political headlines on Iran, Venezuela, and Middle East tensions pushed oil though $80/bbl. A new narrative focused on demand destruction, emerging market stress, Brent contango and rising interest rates is set shift near term market sentiment.
A test of $71.50/bbl is likely with signs of trend exhaustion post max bullishness. Investment banks are now out-competing one another with $90-100/bbl price forecasts, short positioning is building and net length is selling into strength.
Restructure, restructure, restructure. Producers should look to restructure on a potential pullback. Consumers to add to hedges on weakness.

The market was positioned for Trump’s pull-out of the Iran deal but unprepared for the hawkish tone. For anyone with “skin in the game” it was perceived more as a declaration of war than reinstating sanctions. No time wasted, no door open for possible future compromises, straight to the charge.
Our trading backgrounds tell us that the wrong approach is “spreadsheet” analysis and barrel counting. Oil can be an emotional market and the perception of barrels at-risk is everything now.
Our last report “$80+ bbl Brent target” points to clear price targets. Upside remains but risk of a large sovereign hedge program could signal “trend exhaustion”. Contact us for optimal hedge structures.