Amid the increased “noise level”, the most important news to hit the tape was Saudi’s $80 bbl target (from Bloomberg and then a recent Reuters article of $100 bbl). Technicals and analysis of derivatives positioning points to a high probability that these headline numbers will (again) act as a powerful magnet. While Chinese refinery turnarounds are weighing on near term fundamentals, the market is focused on macro and geopolitical risks, not on physical signals.

We continue to see asymmetry in probabilities to upside risk with a multitude of factors in weeks ahead culminating, setting the market up for a medium-term top. The potential risk to the euphoria is the large country hedge (usually around this time of year) which could cap the buying at the margin.

Changes in paper hedging flows has significantly shifted value in various producer hedge structures.

The market is looking for direction, pinned between seasonal weakness and verbal intervention from Saudi/Russia defending the $60 bbl in Brent. We see better entry points ahead for commercial producers with a strong asymmetry in their favour. Essentially, the heavy lifting has been done with a multitude of supportive events ahead. Any pullback should be used to optimise hedging books.
While the “Central Bank of Oil” intervenes, three key variables matter for the oil market: 1) macro, 2) shale exports and 3) geo-political risk ahead.

The length built by the investor community means oil markets are much more susceptible to macro variables, while the repricing of volatility and backwardation challenge producer hedging programs.

Saudi and Russia set to defend $60/bbl (as we have seen this week defending price with Brent at $62/bbl !)). Backwardation, put skew and IMO spec changes, lends consumers an unprecedented opportunity to lock in attractive prices. Consumer flow likely to increase.

Brent selling ignited from a spill-over of equity quant funds rebalancing as volatility across all assets increased. There is a genuine fear that we might be in the middle of a fundamental repricing of volatility across all markets.
Producers are not chasing Brent lower with healthy hedge coverage ratios. Index money remains sticky with resilient Brent spreads and attractive roll yield. CTAs are in the driver’s seat with the 100dma ($63.24/bbl) and $60/bbl as the ultimate psychological barrier where meaningful tranches of selling are likely to emerge.

At this juncture, oil markets must be traded in the broader global, macro context of “risk assets”, especially equities as oil has seen a surge of investor flows pile into the sector attracted by backwardation and momentum buy signals. By definition, it is hard to call a top on liquidity driven markets, however, there are a multitude of signals (which are historically reliable), which point to a market that is near topping out.

Crude and product fundamentals remain solid but are set to take a backseat as we start 2018, while macro, geopolitics and fund flows move to the forefront. In this report, we look at the key signals to monitor for oil price direction.

At this juncture, oil markets must be traded in the broader global, macro context of “risk assets”, especially equities as oil has seen a surge of investor flows pile into the sector attracted by backwardation and momentum buy signals. By definition, it is hard to call a top on liquidity driven markets, however, there are a multitude of signals (which are historically reliable), which point to a market that is near topping out.

Crude and product fundamentals remain solid but are set to take a backseat as we start 2018, while macro, geopolitics and fund flows move to the forefront. In this report, we look at the key signals to monitor for oil price direction.

The OPEC/NOPEC agreement to extend production cuts raises the soft floor from $50/bbl to $60/bbl based on Saudi/Russia solidarity. We expect $60/bbl to be immediately (verbally) defended if crossed. OPEC highlights $60-65/bbl as an acceptable oil price for both producers and consumers. We expect this range to dominate into year-end.
A lot of what we read focuses on looming stock builds in 1Q 2018 that would test the extreme net long position across the oil complex. Our (deeper) analysis into positioning points to a different picture to the composition of the length versus the last OPEC/NOPEC meeting.
In this report we look at key variables to monitor into year-end and throughout 2018. These points are not consensus.