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Oil Producer Report

Oil & Money Conference: Our key takeaways

By October 12, 2018No Comments

We attended the 39th annual Oil & Money Conference in London this past week as well as the Energy Intelligence’s Petroleum Executive of the Year, with BP’s Bob Dudley receiving the honour.

Our key takeaway: A sentiment shift away from “the Saudi put” to limited OPEC+ spare production capacity. Measuring “barrels at risk” is now combined with “explosive” language and actions from hard line US foreign policy. The result is a steep geopolitical premium for Brent.

Strong consumer buying and increasing investor flow is driving short-term momentum and supporting the back end of Brent curve benefiting oil producers from the unfolding paradigm.

Still, discipline must remain, as we see risks ahead that are not reflected in current Brent prices (especially 2H 2019).  The bull case has become consensus, focused entirely on supply. These disruptions may happen, but the narrative holds true only if the extrapolation of demand growth materialises.

Trade wars, rising interest rates, Chinese renminbi weakness and global macro deterioration have a greater risk of ruining the “bull party”, than what is currently factored in oil prices.  

*For detailed analysis on CTC’s Brent-linked hedging portfolio survey, please contact us.

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– OIL & MONEY –

We spent the better part of this week with our friends and colleagues at the annual Oil & Money conference. It is regarded as one of the premier industry gatherings and includes some of the most influential and key players of the oil and gas industry. These are our key takeaways:

1. Sentiment shift away from a Saudi put (i.e. floor protection through production cuts) to spare production capacity limitations (explosive upside potential).

2. OPEC “aware” but “unable” to respond to higher prices.

3. Capex “delinked” from oil prices as Bob Dudley, BP CEO, flagged the perils of underinvestment. This may be laying the ground work for loosening the strings on capital discipline.

 

4. IMO 2020 spec changes could negatively impact simple refiners due to falling fuel oil cracks and a premium allocated to sweet, low sulphur crude barrels.

5.  Supply risk was the consensus “Black Swan” event. Demand risks were acknowledged but dismissed as quantifiable at no greater than 300kb/d, therefore less potential to tip the supply/demand balance.

We agree with the assessment with one caveat, the influence of financial investors in the oil market makes it very susceptible to sentiment changes therefore, relatively small changes in the supply/demand outlook. In other words, if the risk of a supply disruption subsides that 300kb/d will make a big difference on whether oil prices bottom out at $70-75/bbl or $60-65/bbl.

The consensus forecast | Sources: IEA, OPEC, DOE

The consensus forecast | Sources: IEA, OPEC, DOE

6. The emergence of US energy dominance has led to an aggressive US foreign policy highlighted by trade wars with China, sanctions on Iran and Russia and the US withdrawal from the global climate agreement.

7. Fatih Birol from the IEA stressed that expensive energy was back with oil, coal and natural gas trading at multi-year highs. Demand remains at risk due to the threat of macroeconomic factors related to higher oil prices, depreciating currencies and higher interest rates.

Nonetheless, limited supply capacity was expected to support higher prices.

8. Release of the US SPR is a low probability event coming into the US mid-term elections with an overwhelming industry view that releasing 40-50mbbls is ineffective for managing longer term oil prices.

One compelling solution, though, was to release a fixed amount (500-1,000kb/d) from the US SPR over a 1-year period. The scale and growth of US shale oil over the last 5-years provides this type of flexibility for the SPR while many have argued that 700mbbls of SPR was no longer required due to the emergence of the shale industry.

In our view, this makes sense and would be a viable bridge to the de-bottlenecking of US infrastructure in the 2H 2019.


CTC TRADING VIEW

The market is skewed, from a risk/reward perspective, to the upside still in the run up to the full implementation of Iran sanctions (4th Nov).

Our analysis points to passive index money returning “en masse” buoyed by a supply crunch narrative and attractive roll yield (front-end backwardation). With potential for price explosivity into the rollback of US sanctions on Iran, we recommend that producers scale in, adding to positions more aggressively as the supply narrative hits a crescendo.

We continue to see current aggressive consumer hedging flows, responsible for pushing the backend of the curve significantly higher, as the most important variable to producer hedging programs.


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.

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