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Oil Producer Report

Crude Oil Trading Report: Key Trends Unfolding for Brent Producers

By July 12, 2018September 3rd, 2018No Comments

Supply disruptions, trade wars and falling OPEC share capacity dominate the headlines but as the oil market settles in for the summer lull the growing disconnect between physical and paper markets and complacency on consensus 2H 2018 and 2019 demand growth forecasts are the 2 key variables that keep us awake at night.

CTC’s survey on the Brent-linked hedging portfolios of ~30 upstream companies is currently available with an in depth look at hedging instruments, hedge book maturity, average protection levels, peer benchmarking and analysis on hedging flow volumes. Please contact CTC for more details.

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THE RECENT MARKET SELL-OFF WAS PROCEEDED BY A FLATTENING OF THE BRENT CURVE  (See Graph 1).

The front of the Brent curve is nearly flat and flirting with contango, whereas floating storage economics have been in play with the recent weakness in DFL (Dated-to-Frontline).

There has been a growing disconnect between physical and paper markets over the past month and the near $6/bbl sell-off in Brent was the paper markets reconnecting with this reality.

The catalyst was Libya exports returning and growing concerns over trade wars but the warning signs were flashing yellow for some time as the Libya supply disruption could only push near-term timespreads to $0.20/bbl, well below the highs of $0.50-0.60/bbl when flat price was hovering around $80/bbl.

WITH THE BRENT CURVE FLIRTING WITH CONTANGO THE MARKET IS NOT YET OUT OF THE WOODS – AT LEAST NEAR TERM.

The flattening of the curve highlights that OPEC+ supply surge strategy is more than enough to offset disruptions and have refiners with a “pick of the lot” of barrels to choose from in the near term.

The summer, low liquidity period leaves the market vulnerable for another pullback. Though, the kink in the forward curve, (steeper backwardation across 2019) highlight growing concerns on further market tightness post the implementation of Iran sanctions (going from 0.08/bbl to 0.20-0.30/bbl backward) as OPEC spare capacity approaches all-time lows.

Overall, the flattening of the Brent curve improves the optics on longer dated hedges, whereas volatility gives producers opportunity to restructure current hedge portfolios. CONTACT THE DESK FOR FURTHER DETAILS

 

BRENT PRICE & FORWARD CURVE - CLEAR FLATTENING OF THE CURVE

BRENT PRICE & FORWARD CURVE – CLEAR FLATTENING OF THE CURVE

OUR UPDATED PRODUCER SURVEY takes a comprehensive look at the hedging portfolios of ~30 E&P companies with a focus on

1) hedging instruments, 2) duration of hedge portfolios, 3) average protection levels, 4) peer benchmarking and 5) volume.

Whereas, Q4 2017 saw significant hedging flow from RBL related M&A transactions, year-to-date 2018 has generally been a “topping up” of hedges to meet minimum requirements. Furthermore, the rally in Brent, almost in a straight line, saw producers reduce exposure to structures with capped upside (i.e. swaps, collars) and layer in additional, near term put protection (SEE CHART 2).

The driver was 2-fold: 1) narrowing in the put premium versus calls as investors piled into calls on the Brent rally, and 2) producers wanted more participation on the upside as overall sentiment has become more bullish.

CTC BRENT PRODUCER SURVEY

CTC BRENT PRODUCER SURVEY

COMPLACENCY ON 2H 2018 DEMAND, WITH A SHARP SLOWDOWN IN FORECAST DEMAND GROWTH FOR 2019.

The risks to the supply side have been well advertised by the market as OPEC approached record low levels of spare capacity.

We don’t dismiss these concerns just recognize that they are well discounted by the market as shown by the growing disconnect between physical and paper markets.  We are growing more concerned on the demand side.

First, consensus YoY demand growth forecasts are projected to accelerate in 2H 2018 from 1.2mb/d in Q2 to 1.5mb/d in Q3 and 1.6mb/d in Q4.

Frankly, we are very surprised to see consensus so complacent on demand in light of emerging market stress due to higher oil prices, stronger USD and mounting concerns on an escalation of a US-China trade war.

To discuss further the implications and optimal hedging structures, contact us – contact@comtradingcorp.com

Consensus S/D Forecast | Sources: CTC, IEA, OPEC, DOE

Consensus S/D Forecast | Sources: CTC, IEA, OPEC, DOE

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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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