Brent is 5% higher since the markets returned to action post the Labour Day break. As a result, the market has repriced any residual low sentiment from the June/July lows. The Brent forward curve has flipped into backwardation and a flurry of hedging activity has been processed through the market. Fundamentals are back in focus but algos have joined the buying.

For (commercial) producers, the recent price strength has important implications and offers good entry points to initiate (or add) to hedging portfolios, depending on the structure.

Participants are back from holidays; we take stock of the paper market, how sentiment has changed and the dominant factors driving oil prices. CTAs and momentum funds are currently taking a back seat to fundamentals, which are back in focus. Sentiment has bottomed and a new narrative is building in the trading community psyche.

For (commercial) producers, there are important implications as targeted hedging levels should be modified and option structures carefully chosen due to value dislocations and cost differentials.

The main event this week was not the “beat” in DOE inventory data, Shell’s force majeure on Bonny light or OPEC related news. The single most important event, in our opinion, was the technical levels reached on the late week rally with WTI settling at $46.54 and ICE Brent at $48.91 bbl.
Early next week will be critical for the shorts as they suddenly (and quietly) go from full control to a potentially a very different position. As our clients know, we believe it is critical in the current market to be on top of these pivot points. We define and clearly state these key all-important CTA market levels in this report.

Latest exchange data available points to further short positioning in both Brent and WTI. CTAs/ trend following funds have “clean” pivot points and are in control still. As we write, psychological trading damage has been done as price drops hard post strong inventory data across the board.

Record short positioning, firm call skew, and higher oil prices on the back of unconvincing inventory data raises the question as to where the next incremental seller will emerge. The risk and “pain trade” is now to the upside with a real potential of short covering rally.

Producers should remain opportunistic on call skew and contango in both flat price and volatility term structure.

Sentiment in oil markets is extremely bearish. Momentum funds are piling on shorts and have clear targets and pivot points that have worked incredibly well for the past four weeks.

Price acceleration lower appears extended at this point, but there are few signs of trend exhaustion. The $43.50 – $44.00 bbl target we stated for these funds, should provide a bottom. The turnaround in short positioning is extreme, as main chart technicals point to oversold levels. The recent flurry of downward revisions in oil price from sell-side research is probably reaching a peak and could be a good indicator for a price bottom.

Sentiment in oil markets is in full bearish swing with last week’s DOE stock builds putting a nail in the coffin for light sweet prices. Shorts are in clear control as the market struggles with high inventories and OPEC’s inability to reign in oversupply given the recovery in non-OPEC production.

OPEC’s decision to merely extend production cuts showed a disconnected cartel, which was not on the “market pulse”. The 15% decline in oil prices post the meeting, are now the consequences. Our thorough analysis of positioning and option strikes suggests that corrective action (i.e. deeper cuts) from OPEC/Saudi would result in a violent short covering. Short-term this is a low probability call, however Q3 2017 stock draws should stabilize prices.