We can send our thanks to President Trump for triggering the recent round trip to $86 bbl and back to $70/bbl. Increased production from OPEC+ to offset “Iran exports to zero”, a last minute policy shift on waivers for Iran barrels and “verbal management” lower has had its toll on the oil market.
Mid-term elections are over, with “the job now done”, leaving OPEC+ on the back foot to manage damage control ahead of the 6th Dec OPEC meeting in Vienna.
Looking at the shift in the oil forward curve, it is no wonder Saudi Arabia is trying to contain the situation by raising OSP’s to the US (the most visible barrels) and by announcing a 500 kbd cut for December. OPEC+ producers are selling into a contango spot market, whilst (commercial) independent oil producers can hedge ~$70 bbl.
This is exactly what OPEC+ doesn’t want !
*For detailed analysis on CTC’s Brent-linked hedging portfolio survey, please contact us.
THE CRUX OF THE PROBLEM
OPEC has 2 key issues in 2019:
1) An uncertain demand picture with tough YoY comparisons in Q1 compounded with the threat of escalating trade wars and central bank tightening dampening the economic outlook and
2) Contango WTI curve where US shale producers can drill, hedge and lock in attractive returns, almost guaranteeing record levels of production growth and exports (circa 2014-15). The curve is the same shape in Brent.

IN TWO WEEKS THE BRENT CURVE SHIFTED FROM GREAT TO TERRIBLE FOR OPEC+
DEMAND
Above trendline demand growth has arguably been the most underrated variable responsible for balancing the oil markets over the past 18-months. However, this is set to end in 2019 with tough YoY comparisons in 1H 2019, largely due to last year’s cold winter and US tax breaks.
The risk to oil markets is compounded if these potential negative revisions to demand coincide with headlines on tightening financial conditions (Central Bank rate rises, shrinking balance sheet) and rising tensions on US-China trade wars. Bottom line: 2019 is an inflection point where the extrapolation of above trendline oil demand growth ends. Uncertainty on the impacts on the IMO 2020 spec change provide an offset.
SUPPLY
OPEC has a problem due to the shift in the WTI curve into steep contango. A contango curve will allow US E&P producers to drill, hedge and lock in attractive returns at prices well above breakeven levels.
Therefore, those looking for a reprieve in US shale supply due to lower prices may be disappointed. There is risk that the structure of the curve and a tightening Midlands differential accelerates supply growth.

INVESTOR COMMUNITY IN BRENT LIQUIDATED RECORD LONG POSITIONS
Nonetheless, limited spare OPEC production capacity has the oil market balancing a fine line. Headline risks on supply outages remain key and Libya production remains high on the CTC watch list (along with Iran exports).
In fact, Libya’s production moving from a July low of 660kb/d to 1,200kb/d currently, is often overlooked when discussing the wash out in oil prices. Ironically, in 2014 Libya added >600kb/d between April 2014 and October 2014 before negative macroeconomic factors eventually took over. The market seems to be having a case of déjà vu.

BRENT PRICE & FORWARD CURVE
CTC TRADING VIEW
As our clients know, our concerns for 2019 remain mainly on an extrapolation of aggressive demand growth numbers, concerns over macro sentiment, increase US export capacity (with some pipeline projects ahead of schedule) and still significant unquantifiable uncertainty with regards to IMO 2020 implementation.
For year-end, we see Brent trading sideways at best but prone to outages (at least statistically, Libya is due for an outage) with the forward curve flattening further.
Our view is that short-term the selling has done a lot of technical damage and the market doesn’t have the impulse to reach any upside target (the 200 day-moving-average at $74 bbl).
Our CTA momentum replicating models point to short-term “sell” signals but this is still not the case for the more sizable potential volume selling not yet triggered on medium and long-term signals (we are watching this carefully as the flip long to short could be 800+ mil barrels). If that happens, we do not see any buying currently capable to absorb it.
Not all is negative, large consumers are still hedging, using current levels as an attractive entry point to buy 2019+ oil and lock-in economics. China is also pulling hard on imports (9.5 mil bpd in October which we believe is a record high).
But for downside momentum to exhaust and put a floor in, we need to see the negative physical signals in weak front spreads and crude differentials to turn around. The bullish case at this jucture is in need of an outage to save the day.
We provide unbiased market and derivative advice. To discuss further implications and optimal hedging strategies, 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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