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 we believe can cap the buying at the margin.
Changes in paper hedging flows has significantly shifted value in various producer hedge structures.
POSITIONING, MOMENTUM & DERIVATIVES
Let’s get straight to the point on positioning, it is extended, in fact it is $100 bil long so indeed extended, to say the least. Specifically, Brent positioning has never been this extended (not even close) on several metrics with some $42.5 bil long notional.
We have done a thorough analysis of the positioning composition as we believe it is a dominant variable in the current market. The takeaway is twofold:
#1 “STICKY MONEY”, which is the category long oil via index-type products, with participants such as large pension and sovereign wealth funds, is now at ~ $42 bil. This is critical as it is 2/3 of the “non-oil expert” money currently invested in the market.
These flows will not rebalance (i.e. sell) on price dips, as would speculators, and are driven by backwardation and the “roll yield” creating a much more dangerous situation for potential shorts (contact us if you want further explanation on this).
#2 THERE ARE NO SHORTS IN THIS MARKET and even if your background is not trading, it is not hard to see why: who wants to short the oil market in size ahead of potential explosive headlines and Tweets in the current geopolitical climate. The consequences are quite dramatic as the market becomes a self-fulfilling cycle of “buy the dip” mentality. Selling comes (only) from long liquidation and “take profit” orders. The lack of pyramidal short selling, which we saw in 1Q and 3Q 2017, leads to shallow dips with no follow-through from additional short selling.
We have done this long enough to know that the market can change fast and when it does, one must be quick to react, but for now this is the market setup from a positioning point of view.
Price action is flashing full “green light” buy signals to momentum-driven funds – See chart 1
Our algo replicating models are flashing short, medium and long-term buy signals – What is more, the weekly close on Friday the 13th April, above $71.50 bbl in Brent was a key pivot point and a level the market failed to close above back in January. This is no coincidence, it is the 50% retracement from the June 2014 highs of $115.71 bbl to the Jan 2016 lows of $27.10 bbl that momentum funds and CTAs had been pushing for. Now that the level has been achieved, at least from a technical perspective, there are practically no strong resistance levels above for several dollars higher.

CHART 1 | BRENT PRICE FLASHING BUY FOR MOMENTUM-DRIVEN FUNDS
VALUE HAS CHANGED FOR PRODUCER STRUCTURES, with paper flows impacting the derivatives market.
Put premiums for 1 year forward maturities, which up until early Feb were trading at a 6 volatility point premium to the calls, is now inside of 4 vol points. In other words, the recent surge in insurance buying and especially call buying has depressed values for put protection relative to call protection, which is now more expensive.
Who is buying all these calls? The answer is macro hedge funds for the balance of 2018 maturities and consumers, mostly airlines, buying collars in 2019 + 2020.
This is good for producers, not only because of lower put premiums, but because consumers are buying the back-end of crude. Furthermore, our conversations with major consumers suggest that they could potentially be back in very sizable volume on a market pullback.
There is clearly a re-awakening of consumer hedging driven by the new International Maritime Organization (IMO) spec changes to high sulphur fuel oil.
This is particularly bullish middle distillate with incremental distillate demand estimated at 2.5-3.0mb/d.

RECENT PRODUCER ACTIVITY BY PERIOD | Source Morgan Stanley
CTC TRADING VIEW
For oil prices, the path of least resistance remains higher on the back of upside asymmetry in risk probabilities. Limited technical resistance, Saudis talking the market higher, rising geopolitical and higher inflation risks suggest that oil prices are likely to push to $80 bbl before a pause in momentum.
Technical lines in the sand for momentum funds, include the psychological $75 bbl and $77.75 bbl, but these are secondary points of resistance and will likely not be enough to cap the current chase higher.
We are monitoring for first signs of a trend exhaustion to signal that the time is ripe to sell the market. The trigger may not be from demand or physical spreads but from the massive country hedge capping the market with investor flows maxed out.
To discuss further the implications and optimal hedging structures, contact us – contact@comtradingcorp.com
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Commodities Trading Corporation is a London-based private advisory company specialized in commodity risk-management, hedging & trading. We service a growing need in the natural resources sector for unbiased and strong expertise and provide our services to an array of corporate clients and financial institutions. We are experts in derivatives and monetizing volatility and develop corporate strategies for hedging energy portfolios, using bespoke derivatives solutions for price risk mitigation.
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