Oil prices have now recovered back into the post OPEC/NOPEC range. With OPEC’s meeting tomorrow on 25th May, we look at the most plausible outcomes, what it means for the market and the impact on producers looking to hedge on the curve.
PRICE ACTION: The oil price recovery continues with Brent trading $54 bbl and WTI $51.30 bbl (+15% from the May 5th lows of $46.64 bbl in Brent).
The price rise has kept a strong adherence to chart technicals and momentum indicators. Currently, oil prices have stalled with some technical indicators (stochastics) leaning on the overbought side.
The recent pause in oil prices, ahead of the OPEC meeting, is no coincidence: ICE Brent front month rolling contract is currently trading at the 100 day-moving-average (DMA), the July contract (current front month) 200 DMA, both at $53.85 bbl! To add, recent price rise stopped just on the 200 DMA at ~$54.50 bbl.
Note that the average price for Brent since the Nov OPEC/NOPEC announcement is right on the $54 bbl line in Brent (right on the current price of $51.20 bbl in WTI). As with all clusters of key levels, it makes sense, that price is not just crossing through these levels without notice.
We continue to point to these key technical pivot areas to our clients as they continue to prove critical in current market conditions. We would prefer to focus on fundamentals, but as it stands, momentum
and technical indicators are driving key inflexion points in the market. We will continue to monitor both and highlight when the importance changes.
The analysis of CTA/ momentum fund positioning and open strike concentration also continues to prove critical. Long positioning is as “clean” as it has been in a long time.
Our read of volume weighted average price (VWAP) combined with open interest in past days’ points to, not an unprecedented, but nonetheless some $5 to $8 billion of shorts “caught offsides” at current levels (…and one day from OPEC’s official announcement!). It is surprising (to us at least) that shorts have not yet covered.
Clearly, that is tailwind to the upside – and perhaps finally – could it be enough to push the front of the curve above year-to-date highs and above levels US producers are eyeing, with their finger on the trigger, to aggressively sell (see last week’s chart of swap levels with hedge programs if missed)..?
Note: For producer hedges, key pivot points have proven to be critical, especially for when layering in hedging clips. Contact us to get more details on potential strategies and structures.

Chart 1 – Brent– Daily since announcement – Source: Bloomberg & CTC
FIVE SCENARIOS AHEAD OF THURSDAY, 25 MAY, OPEC MEETING
- BIG MISS <10% probability: OPEC struggles to negotiate a deal, even a 6-month extension of cuts in jeopardy. Market sells off Day1 to $48 – $50 bbl area (recent lows), prices drop eventually to $30 – $40 bbl area. Implied volatility increases sharply, put premium versus equivalent calls (put skew) moves to 2016 extreme levels.
- SMALL MISS <20% probability. OPEC extends cuts for 6-month only, commitment and unity weak within OPEC/NOPEC participants; market has little confidence for future cuts/intervention. Market sells off Day1 to $50 – $51 bbl area, prices drop eventually to $42.5 – $48 bbl (the pre-announcement price area).
- BASE CASE >50% probability. OPEC announces a 9-month extension and continues with the central bank language (i.e. “…doing whatever it takes…”). This might well be the case of “buy the rumour, sell the news” as this scenario appears to be fully priced in (we hope OPEC are aware of that!). Market sells off Day1 to $51 – $52 bbl area and prices linger around these levels for a few weeks. Current positioning should support prices. An avalanche of liquidation is not in the cards with long positions well below year-to-date highs. CTA’s/ momentum funds would likely join the selling as prices move lower (we saw this “pyramidal selling” early May as evidence by higher open interest combined with acceleration lower). Some producers could get spooked. They have not been selling at lower levels, but now some may chase prices lower to lock in prices along the curve.
- BEAT <15% probability. Announcement includes the 9-month extension in unanimity(ish), combined with strong, committed language, that market is to be assessed (with a specific date) for possible further extensions. A mention on Nigeria and Libya, with a plan to bring them into the deal is put forward and/or with Saudi Arabia tackling heads on, one of the main problems, their destocking (while they cut production, they kept exports high with some medium and heavy grades swapped for light sweet). Market gaps higher initially, eventually takes out the April highs target $56 – 58 bbl (post deal highs).
- BIG BEAT <5% probability. The above #4 scenario plus deeper cuts: flat price trades into the $60 – $62.5 bbl area, curve flips into backwardation. Implied volatility moves higher initially, providing good, albeit temporary, vol opportunity for producer structures (quick reaction needed).
OPEC TWIST – OPEC has learned from the Nov announcement and want to improve the “bang for the buck” with the previous unprecedented OPEC agreement not yielding the expected result. If OPEC/ Saudi announces some sort of forward selling on the curve “a la Mexico” (whether they intend to or not is beside the point), they would get what they seek: backwardation.
Note that Iraq is considering the potential of hedging – which shows that discussions are happening (increases possibility versus 5yrs ago).
In this case, they sell at higher spot prices and commercials are dis-incentivised to sell further out on the curve. This long-dated spread, is a sort of OPEC versus US/Latin America producer spread (they want it as high as possible).
Obviously, that would have significant implications for commercial hedgers. For example, the front contracts could trade up to $62.5 bbl with 2H18 unchanged. Our “gut feel” tells us something along those lines could lie ahead (We would advise them to implement such a strategy).
We reiterate our views:
In summary, we see the market “throwing in the towel”, just when the physical draws in visible stocks are on the cusp of kicking in. There are a multitude of factors aligned for 2H17:
(1) OPEC: Clear commitment, record high compliance and extension of cuts likely.
(2) Higher US / non-OPEC production is now factored in. Surprise Nigeria and Libya production have been factored in and more at risk to disappoint.
(3) Bulk of refinery maintenance soon behind, crude throughput will increase significantly.
(4) OPEC domestic destocking done. OPEC’s exports aligned with production combined with seasonal demand upswing – will quickly impact visible stocks.
(5) Floating storage (especially in Asia) will drawdown in 2H17, global demand is not weakening but stabilising (US gasoline, India).
(6) strong tailwind from derivative positioning, notional invested in crude oil significantly below recent and 5yr average. Flattening/backwardation in prompt contracts means, pension allocation to rebalance towards commodities asset class.
As backwardation means investors are paid to hold the position even if oil doesn’t perform (oil indices will go up even if the futures don’t move).
Contact CTC Trading Desk to know about more about how we help with risk-management, hedging related services and market views: contact@comtradingcorp.com.
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Commodities Trading Corporation is a private advisory company specialized in commodity risk-management and hedging. 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 about what we do, how we can optimize your hedges and directly improve your bottom line, contact us at contact@comtradingcorp.com.
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