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Oil Producer Report

Crude Oil Trading Report: Flurry of data reignites sentiment

By October 12, 2017No Comments

Saudi put firmly in place. OPEC “managing the market” with headlines , suggests shallow pullbacks, higher lows.

Cautious optimism reigns. Hedge funds buying short-dated puts and oil producers using rallies to layer in hedges. However, backwardation breeds backwardation, investor thirst for yield, weak USD and the consequences for incremental money flows into the oil complex should not be underestimated.

Flush of data (IEA, OPEC, EIA month reports, Q3 shale reports) and headlines (KRG, Iran sanctions and Venezuela state elections) can bring fundamentals and geopolitics to a crescendo near term.

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SAUDI PUT FIRMLY IN PLACE: The dip in oil prices from ~59/bbl was quickly met with OPEC rhetoric in support of reducing excess oil stocks.

First, Russia and Saudi Arabia continue to show unity, both endorsing their commitment to the supply cuts.

Second, Amin Nasser, chief executive of Saudi Aramco, highlighted that the Aramco IPO remained on track for 2018. The market reaction and perception is support for prices closer to $60/bbl, rather than $50/bbl.

Third, Saudi stated that it will cut November oil exports by 560 kb/d to 7.15 mb/d versus customer demand of 7.7 mb/d. Saudi Arabia appears to be moving to a Fed-like approach to managing the global oil market by providing visible benchmarks. Saudi’s emphasises on exports, alongside production relieves the market concern that weaker domestic demand from OPEC producing countries was pushing barrels to global markets, therefore limiting the impact on visible oil stocks.

The Saudi/OPEC put is firmly in place until the 30 November OPEC meeting. Consensus is building for an extension of the OPEC cuts well into 2H 2018. What should our producer clients be focused on? Most important, will be post the OPEC meeting and whether oil trades $60+/bbl. Oil above poses a delicate problem for OPEC and the market’s focus then will move quickly to OPEC cheating on quotas and the imminent “OPEC taper”. This is where record net length across the complex will pose a risk for “OPEC taper tantrum”.

An OPEC taper has important implications for oil markets. OPEC would be remiss not to address some key points on timing and key triggers at the upcoming OPEC meeting where OPEC will act to lower compliance or snapback supply cuts if visible stocks start to build above seasonal norms.

AVERAGE OF LATEST S/D DATA FROM IEA, EIA, OPEC & CTC

AVERAGE OF LATEST S/D DATA FROM IEA, EIA, OPEC & CTC

OPTIMISM INTO 30 NOVEMBER OPEC MEETING:
Our view was that the strong momentum of Sept would lose steam last week on a near term positioning flush-out based on:

1) Widening WTI-Brent spread: US shale exports hit ~2.0 mb/d.
2) Falling refining margins
3) Narrowing backwardation in distillate: Distillates are a double edged sword at the moment. Fundamentals are attractive (stocks below 5-year averages, IMF upward GDP revisions) but net length at ~ 2x previous highs. Fears of a contagion washout starting in distillate is at the top of our list in terms of signals to monitor.

While we have concerns of a technical-led wash-out, there is one important caveat – a substantial portion of this additional investor length was initiated at the $55-55.85/bbl level. Until these positions are caught offsides, the risk of a near term wash out is limited. Further, technical trading levels are resetting on current price consolidation. Momentum players (CTAs) would then use this as a signal to reload positions for a push higher.

CONVICTION LOW, BUT FLUSH OF DATA AND HEADLINES SUGGESTS MORE UPSIDE RISK:
Net length across the oil complex has lowered our conviction levels for being outright bullish. While being positioned max long at current levels (which we recommended in late June with positioning near record shorts) makes less sense, we find ourselves, at this juncture, long rather than short. The key drivers include a the flush of data, including monthly reports from the EIA, OPEC and IEA, upcoming US shale 3Q earnings, and rising geopolitical risks. This in combination with a well-defined OPEC put and solid fundamentals setup oil prices on sound footing.

The string of monthly oil reports from OPEC, EIA and IEA showed a common theme of increased demand forecasts and moderating non-OPEC production growth. The end result is a more constructive supply/demand balance for 2018.

The potential for higher geopolitical risk premium is building as inventories approach 5-year averages and spare capacity tightens. Key dates to highlight:

• 15 Oct Venezuela state elections
• 15 Oct deadline on US/Iran sanction waivers
• 18 Oct China Communist Party Plenum

For US shale Q3 results, we are focused on management comments on growth versus returns. Recently, Anadarko and Linn Energy have been rewarded for share buyback programs rather than rising capex and drilling activity. The shift in investor biases towards returns rather than growth must be monitored. Effectively, this could limit upward revisions to US supply growth beyond already aggressive expectations.

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