The physical market 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
TIGHTENING NORTH SEA
Signals of physical market tightness in the N. Sea are feeding bullish sentiment. It was the last ingredient missing from the bullish narrative…voila, now that it has arrived sentiment is saying “let’s get the party started”.
Physical market tightness signals range from backwardated Brent timespreads, widening Brent/Dubai and strengthening WAF differentials. All illustrate that the oversupply evident in light sweet barrels in the Atlantic Basin over the summer, is now gone.
The return of China teapot refineries on improved refinery margins and the completion of Chinese crude oil inventory destocking accounted for a sharp rebound in Chinese imports in August (up 13% YoY to 9.04MMbbls/d). According to Kpler oil data, average arrivals through the first 12 days of September are currently holding up at 1.28mbpd YoY. Just what the bulls needed.
REALTIME SUPPLY CONCERNS
The implementation of US sanctions on Iran is still 8-weeks away, however real-time vessel tracking data from Reuters and ClipperData show Iran exports below 2mb/d in August. The loading program for the first 10-days of September at 1.5mb/d with a growing list of Europe and Asia buyers switching to alternative sources.
“The street” now factors in a 1.0-1.2mb/d decline in Iranian oil exports.
Meanwhile warring tribal factions in Libya highlight growing vulnerability to 1.1mb/d of production. The situation in Venezuela shows no improvement with drilling activity at multi-year lows. Natural field declines in Angola continue as a direct result of underinvestment in new upstream projects. Involuntary cuts within OPEC are dragging down spare capacity within the cartel to near record lows.

CTC VIEW: DEMAND DESTRUCTION COMING FROM EM
The key supply side factors CTC are monitoring include:
- Iran, floating storage is increasing (6mbbls) as export outlets close
- Iraqi exports, which are increasing notably (a picture similar to 2012 Iranian sanctions).
- Turkey, now that it finds itself “cornered” financially, could prove to be a facilitator for at least some of these sanctioned barrels.
- China, a sort of de facto “swing buyer” for Iranian barrels. It has a capacity to play a pivotal role by continuing to import ~300kb/d of US crude or by pressing “where it hurts” (switching US for Iranian imports).
- Nigeria, general elections early 2019 may spark short-term production outages.
- Syria, unintended consequences and conflagration throughout the Middle East as proxy wars escalate in the region
- US shale exports, infrastructure constraints are slowing production and exports. US limits providing the “swing” barrels the market needs. In 2H 2019 this may change but pipeline and infrastructure expansions must be monitored for delays.

The consensus forecast | Sources: IEA, OPEC, DOE
HEDGING PAPER FLOWS
The investor community is the most important driver of near term sentiment and momentum as highlighted by the $10bn of net buying added to over the past 2-weeks. Investor positioning cleaned up over the summer as prices weakened. There is now considerable dry buying powder on the side-lines that can return should the narrative crescendo into an oil supply crunch.
Consumers, and particularly airlines, have been the key driver of deferred oil buying with hedging activity now extended well into 2021. This is significant as the relentless consumer buying provides optimal moments for Brent-linked producers to hedge as deferred Dated Brent prices hit 3-year highs – CONTACT US FOR MORE ON THIS –
While we have seen a recent uptick in producer hedging activity, our most recent Brent producer hedging survey* points to some complacency on the part of producers. No question, producers have lots to be bullish about.
The upstream environment has improved dramatically from year ago levels.
However, higher prices and a narrow trading band have lulled the industry into a false sense of security.
We are fully aware of the bullish supply implications over the coming months, however, the threat of an oil price spike exposes producers to greater uncertainty and a wider range of potential price outcomes in 2019. As a result, we expect to see an acceleration in producer hedging activity into year end.
Investors positioning for an intensifying supply crunch narrative into year-end makes for explosive upside for the market near-term.
However, don’t lose the forest from the trees. Oil prices >$80/bbl will have a meaningful impact on demand (primarily emerging market demand) and opens the outlook for prices to greater uncertainty and a wider dispersion of potential outcomes.
Producers should take advantage of such opportunities to lock in attractive prices and decrease uncertainty.
CTC TRADING VIEW
The market is skewed, from a risk/reward perspective, to the upside. Our analysis points to passive index money returning quickly as the paper market sentiment is buoyed by a supply crunch narrative that is intensifying.
Hedge funds are driving this narrative as concerns on emerging market demand have been brushed aside (at least for now). With potential for price explosivity into the rollback of US sanctions on Iran, we recommend that producers scale in lightly, adding to positions more aggressively as the supply narrative hits a crescendo.
We believe that for Brent producers right now, the most important variable to monitor is consumer hedging flows pushing the backend of the curve significantly higher.
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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