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.
PERCEPTIONS
Markets are dominated by perceptions and reflexivity, in our view. This is why we spend so much time and effort measuring positioning and sentiment.
Short-term, it is all about the time frame and loss of Iran barrels. Iran: oil output increased from 2.8mn b/d to 3.8mn b/d since sanctions were removed in 2015. The market is now baking-in a disruption of 500k – 750k b/d of Iranian barrels.
But to us (through a trading lens), Trump’s speech was not about sanctions but more a declaration of war. Regime change in Iran appears to be a clear aim of President Trump and his team (re-appointment of Iraq-led invasion WH team). There is now little-to-no room for negotiation or possible compromise (unless Iran gives up everything it feels it stands for). This, we believe, is not yet factored in the market.
SAUDI BARRELS TO THE “RESCUE”
Saudi jumped to say it will work in coordination with OPEC and Russia for the sake of market stability. The idea here is that, given the recent cuts, it would release barrels to compensate for Iran’s production loss. Clearly a swap of barrels approach – how convenient!
We bring to our reader’s attention the fact that crude oil forward demand cover is now below historical averages and any cushion has now largely evaporated both within OPEC spare capacity and global oil inventories.
WTI-linked crudes have largely underperformed Brent with pipeline capacity constraints in the Permian Basin and infrastructure limitations on exports and domestic light sweet oil refining capacity. For Brent-linked crudes, it is a whole different story. A potential increase in Saudi production would mean less OPEC spare capacity in a market where the inventory surplus has disappeared.
Any unplanned outage, with global unplanned outages at historical lows would result in substantially higher prices. Libya, Venezuela, Angola and Nigeria barrels are potential candidates for supply disruptions.

Higher timespreads correlated to lower global oil stocks | Source: Goldman Sachs Research
WRONG APPROACH VS. GOOD APPROACH
Hammers see nails and oil analysts count barrels. At the moment, it is “too cute” to be counting barrels. It is now all about perception and the market pulse is on the Middle East and any military escalation and/or secondary fallout from the US walking away from the JCPOA deal.
The rising political risk in the Middle East could take a variety of shapes and forms (by no mean exclusive to this list):
• Middle East nuclear arms race
• Escalation of military conflict between Iran / Israel outside of Syria
• Expansion of Yemen war and disruption to Saudi Arabia infrastructure
• US compromised in supressing ISIS in Iraq without the help of Iran
Currently, the market is not waiting for the “barrel counters” to get it right. At the moment, it doesn’t matter if it’s 200kb/d or 800kb/d of lost Iranian barrels, the market perception is that something has fundamentally changed in the Middle East and with repercussions in the oil market.
Oil can be one of the most emotional driven markets we know of, we have seen it at certain moments in the past (both in up and down markets), and it appears to be in repeat mode!
Invoking additional emotional fear into the oil markets are upcoming parliamentary elections in Iraq on 12 May as well as Presidential elections on 20 May in Venezuela. Non-OPEC growth is estimated to hit near record highs of 2.0mb/d in 2018, while OPEC is truly a “house of cards”.
INFLATION, RATES, THE ECONOMY & OIL DEMAND
With the Federal Reserve close to its inflation target, the recent move higher in oil prices may be just enough to increase the potential pace of monetary tightening.
US 10-year Treasuries recently broke the psychologically important 3% level and the combination of Central Bank unwinding QE has the potential to slow down global GDP and oil demand growth.
An important benchmark to watch will be US retail gasoline prices, which are currently at $2.83/gal, approximately 21% above last year. Memorial Day weekend (26-28 May) marks the start of the US driving season and despite the US near full employment, wage increases have been limited. This could potentially spell trouble for the US consumer if US retail gasoline prices move above the psychological $3/gal marker and could have negative implications for oil demand.
Within Europe and oil consuming EM countries such as India, China, and Turkey, a rising USD in combination with higher oil prices could drag on growth and oil demand.
Current demand growth has been a key driver of strong oil markets (and EM growth has been the bulk of growth, 80% this year) and for perspective we have to go back to the early 1970s to find a period where we had 4 consecutive years of >1.5mb/d of oil demand growth.

Putting it in context: BRENT Historical price and Forward curve | Source: CTC, Bloomberg & ICE
GUIDELINES ON HOW TO HEDGE IN THE CURRENT MARKET
The path of least resistance remains higher for oil prices 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.
A technical line is $77.75 bbl, which represents the 50% retracement from the March 2012 highs of $128.40 bbl to the Jan 2016 lows of $27.10 bbl. This is merely a secondary point of resistance and unlikely to do much more than pause momentum in the absence of bearish fundamental news.
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.
For more information on CTC, insights on risk-management strategies & trading views, contact us at contact@comtradingcorp.com.
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