Crude oil price in a tight range – Market on hold waiting for OPEC data – “Investor” positioning at record – Options implied vols sub-30%, make premium buying attractive.
Oil price are caught in a compressed range, combined with reduced volume. Looking at the price action in the Dated Brent 2017 swap, it has been confined, in the past three weeks, to little more than a $55-$57 range (chart 2 below). A fresh, strong catalyst is required to inject some life into the market. Of course, it is not hard to see why the market keeps oil in such a tight range and what that catalyst could be. The market is in a wait and see mode for the release of the OPEC Jan data (released end of Feb) and so far, compliance is clearly solid.
Nonetheless, the action is in the spreads and the WTI/BRENT arb. One of the main pull on the N Sea barrels recently has been the Asia buying, mostly from China teapots/SPR program. For this month, 12 mil bbls is set for Asia and that with the Reuters report that Forties and Ekofisk loading programmes will be much lower for March (1.2 mb m-o-m). There has also been some report of pipeline leak in Libya’s Messla field which affects ~70k bpd of crude. That has contributed to kick momentum in the spreads where the BRT March/April is almost in backwardation. Admittedly, with March expiry today, the April/May spread tell more of a story and that has clearly been strong (chart 1 below). Further back BRT DEC17/DEC18 is well established in backwardation now, flows (producers) would have to materially shift for this to flip into contango now.
There is also continued confusion in crude markets following suggestions that a 20% tax could be imposed on all US imports (raises the question as to Saudi barrels to the US?). The main takeaway to me is that the “Trump reflation trade”, ie. lower taxes, infrastructure and protectionism, is explosive to commodities (cost-push inflation). For energy, the beneficiaries would be US oil/gas
exploration and production companies (I believe the Goldman report puts it as $20 bil better positioned versus overseas rivals).
This has resulted in the “spec activity” to jump on the WTI/BRT trade which has seen increased volatility and the most talked about now is the WTI Dec18 spread. The funds are very active, as the data shows, they trade very large clips via options (BBG ticker BYZ8C .00 ). Needless to say, the short gamma caused on the back of that flow, as market makers who sold the options look to trade the underlying to risk-manage the position, exacerbates the volatility in turn.
The positioning data is at record all time high net bullish in crude oil (note: in # of contract, not in total $ amount). This has again increased last week (+ WTI, -BRT) and therefore it looks like the market is not nervous and positioned for OPEC to deliver hard. Looking at the wider data though, to me it appears a bit more worrying. The OPEC/NOPEC agreement and the “Trump trade” have put radar back on commodities from the broader investor community: there has been some $20 bil of fresh new money coming into the commodity index (BCOM). Yet prices failed to make a new high. The divergence in price and positioning is unlikely to continue (the correlation between the two is clear historically). Therefore, either a new catalyst triggers significant new inflows (OPEC delivers?), pushing positioning to even more extremes, or some long liquidation is likely.
If there was any time, between now at the Jan OPEC data release for this to happen, now is probably as best as it comes as Singapore/Asia is out of the market (and since one of the clear pull/momentum has come from there).
ICE Brent April/May Spread
Dated Brent 2017 swap – 1mth chart
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