Is This Oil Price Rally for Real or Just a Dead Cat Bounce?
With oil prices spiking scarcely 10% from final Friday’s sudden, defeat “flash crash” that was maybe driven by Pierre Andurand liquidating his whole prolonged book, there has been a hasten by analysts to “fit” a account to a cost movement and a remarkable change in momentum, many particularly by Goldman, that continues to siphon one after another bullish wanton note, we suspect given Goldman’s column trade table still has some oil left to sell to clients. However, is a new rebound an denote of a tolerable instruction shift, facilitated by a another even some-more strident turn of OPEC jawboning even as shale oil prolongation continues to grow, or usually a passed cat bounce?
According to Bloomberg FX commentator Mark Cudmore, a answer is a latter as he explains in his latest overnight “macro view” note.
Traders’ New Love for Oil Isn’t Basis for Marriage: Macro View
What a disproportion a week makes. Oil prices are some-more than 9% above final Friday’s defeat low. The rebound has legs in a short-term though it doesn’t change a long-term bearish story.
Recent newsflow justifies this rally. U.S. oil inventories usually showed their largest dump of 2017, and a fifth uninterrupted weekly decline. OPEC is approaching to extend prolongation cuts when it meets May 25. Goldman reiterated a bullish call for an approaching supply deficit.
February’s record suppositional prolonged position has been roughly halved. The marketplace technicals seem healthy and uninformed for a postulated bounce.
That’s a short-term outlook. But during some indicate a many bigger design will browbeat again and that entails a distant some-more disastrous askance on a situation.
As Bloomberg oil strategist Julian Lee wrote, a OPEC prolongation cuts would need to be significantly deepened to mislay a OECD save by year-end — generally in a face of increasing outlay from Libya and Nigeria.
OPEC itself usually lifted a foresee for 2017 prolongation from non-members by 64%. U.S. Baker Hughes supply count has climbed for a past 16 weeks.
U.S. stockpiles might now be display a solid decrease – though usually from an impassioned record. They are still above any turn seen before this year.
The critical backdrop is that descent from shale continues to turn cheaper and some-more fit all a time, obscure a cost indicate above that prolongation will fast boost to inundate a marketplace with supply.
And simultaneously, there’s a delayed and solid expansion of renewable/alternative sources of appetite as good as technological improvements in appetite storage and transfer. That’s though mentioning a C-words: CO and meridian change. Even though Trump’s support, efforts to revoke emissions and a use of oil-derived products are garnering some-more and some-more support.
All this boils down to a long-term, structurally bearish story. Rallies can final for weeks, or even months. But don’t get too attached. They won’t lift we by to aged age.
Separately, here is Commerzbank doubling down on a bearish account with a possess overnight note, it that it warns that should OPEC extend outlay curbs on May 25, it “is doubtful to be some-more successful than a cuts implemented so distant in a longer term,” according to a bank’s conduct of commodity research, Eugen Weinberg. He also points out, logically, that a prolongation might “considerably tie a marketplace in a second half, nonetheless will usually boost non-OPEC production.“
The wilful factor, if usually for a time being, technical positioning, as algos continue to suffer interlude out whichever side is positioned some-more heavily in a oil cost debate. – Zerohedge
Why Goldman Thinks You Should Go Long On Oil
As melancholy sweeps over a oil market, a few distinguished voices are unbowed, arguing that a marketplace is good on a approach towards balance.
Goldman Sachs’ conduct of line Jeff Currie pronounced during an SP Global Platts Conference in London this week that investors should substantially be going prolonged on wanton oil given a marketplace is already in a supply deficit. He forked to a futures market, where a bend could be headed into backwardation – a conditions in that near-term oil futures trade during a reward to contracts serve out. That structure points to concerns about a necessity in a brief run, that is given front month contracts would trade during a aloft cost than deliveries 6 or twelve months away.
But a backwardation is also a sign of fears over long-term oil prices. Goldman Sachs has consistently argued that wanton prices could sojourn comparatively low for years to come as a cost of prolongation has shifted lower. So, reduce long-term prices have pushed a behind finish of a futures bend lower, with near-term prices trade higher.
There is a feedback outcome from a marketplace changeable into backwardation. If mark prices are above long-term prices, afterwards fewer companies will be peaceful to close in subsequent year’s prolongation during those reduce prices. Without industry-wide hedging, a ability to grow prolongation is diminished. Or, as Goldman Sachs put it in a latest investigate note, “fear of long-term surpluses reinforces near-term shortages.”
Putting some of a lingo aside, Goldman is simply arguing that a oil marketplace will be many tighter this year than many people seem to think. The investment bank forecasts earnings on commodity prices on a sequence of 13.3 percent over a subsequent 3 months and 12.2 percent over a subsequent 12 months.
That prophecy is formed not usually on a idiosyncrasies of paper trading, though ongoing improvements in a earthy market. For example, Goldman predicts a rather medium register build of usually 6 million barrels (crude oil and polished products) opposite a U.S., Europe, Japan and Singapore between Mar and April, that is many reduce than a standard 16-million-barrel boost for this time of year.
Goldman also cautions everybody not to review too many into a unusually high register turn in a U.S. given a U.S. has a lowest cost storage capacity, and as such, it will be “the final to draw.” Also, a U.S. has a many “visible” data, so there are a lot of drawdowns function elsewhere in a universe out of full perspective of marketplace analysts. In short, U.S. inventories are a “lagging indicator of a rebalancing.”
And even that lagging indicator is starting to improve. The EIA reported on Wednesday a warn drawdown in oil inventories, with bonds dropping by 5.2 million barrels, many some-more than a markets had anticipated. That led to clever gains for WTI and Brent, both of that were adult scarcely 4 percent during midday trade on Wednesday. Even better, gasoline bonds did not rise, bolstering a perspective that a drawdown was for genuine and not usually a changeable of product from wanton storage to gasoline storage.
If U.S. inventories are a final to pull down, as Goldman Sachs says, afterwards a fact that they are indeed sketch down lends some faith to a investment bank’s assessment.
The IEA agrees with Goldman’s view, arguing that supply is already surpassing direct in a second quarter, and a necessity will grow in a second half of a year as prolonged as OPEC extends a prolongation cuts. “It is starting to turn transparent that if a design of a OPEC cuts was to flip a marketplace from over-abundance into necessity that is now solemnly commencement to happen,” a IEA’s conduct of oil analysis, Neil Atkinson, pronounced during a Platts London Conference.
So given did prices sell off so neatly final week? As they have mentioned before, Goldman chalks it adult to technical trade and sentiment, not given of bad fundamentals. They acknowledge that a marketplace is balancing slower than everybody expected, though a investment bank stood by a prophecy that a oil marketplace is tightening. – Nick Cunningham
Oil Price Volatility Spikes Amid OPEC’s Charm Offensive
“Well he would contend that, wouldn’t he.” Mandy Rice Davies during a time of a Profumo scandal, 1963.
OPEC has mounted nonetheless another attract descent as a outcome of final week’s roughly 5% pile-up in a tellurian cost of crude. As was widely reported by a handle services, a title from Saudi Oil Minister Khalid al-Falih to a outcome that a Saudis would do whatever it takes to finish a tellurian supply bolt of wanton strike a universe press on 8 May and gave markets a short-term boost. Al-Falih was quoted as observant that tellurian oil markets had softened from 2016 lows when wanton prices fell next a $30 per tub turn for a reason. “I trust a misfortune is now behind us with mixed heading indicators display that supply-demand balances are in necessity and a marketplace is relocating towards rebalancing. We should design healthier markets going forward.” He also approaching tellurian oil direct to grow roughly homogeneous to final year with both China and India remaining assuage to clever consumers of Saudi black gold. What’s more, al-Falih settled unequivocally resolutely that a six-month prolongation is all though a finished understanding and even suggested that OPEC is looking during fluctuating a cuts over a finish of 2017.
Well, he would, wouldn’t he? But is a marketplace desiring it? As can be gleaned from a weekly COT (Commitments of Traders) reports from a CFTC (U.S. Commodity Futures Trading Commission), a large bullish gamble on wanton for this cycle unequivocally began in Nov 2016 amid sound out of OPEC per a cuts, though before any petrify movement indeed occurred. As during mid-November 2016, a bulls outweighed a bears by about 276,000 WTI contracts, with a rise available on Feb 21 2017 during usually over 566,000 contracts. That was an easy double in usually about 3 months. The latest trade data, however, shows that sidestep supports and other speculators have decreased their bullish bets, holding their net longs down to about 373,000 contracts, a lowest turn given a OPEC understanding was announced final year. That’s a 34% dump from rise to stream trough. Put another way, OPEC credit has taken a strike of about one-third.
The media contingency allot reasons for daily movements in a cost of crude: a OPEC understanding is on/is off; OPEC will extend into 2017, no it’s going to be 2018; tellurian mercantile expansion will be aloft than approaching this year ensuing in some-more wanton being consumed/no it won’t; direct for wanton is rising faster than formerly foresee generally in rising markets/no it isn’t, etc. In reality, cost movements are mostly pointless and mostly in a area of aloft arithmetic as suppositional funds’ algorithms are unequivocally likewise structured and tend to respond in unison as a pile-up final week attests.
So if OPEC is huffing and blasting and a supports aren’t shopping it, what other magnitude can infer or oppose what appears to be ascent vigour for a longer-term downward leg in WTI? Interestingly, during a large rave in hyper-bullishness from Nov 2016 to Feb 2017, a sensitivity of wanton as totalled by a CBOE oil VIX index (OVX) decreased considerably (see chart). The VIX is infrequently called a fear barometer and infrequently a relief indicator, given it derives a value from a sensitivity submit in wanton oil futures/options pricing. Like a U.S. batch marketplace VIX equivalent, that marks a SP 500 and has shown identical ancestral lows, a large doubt is why, and a answer is that trending markets both on a upside and a downside simulate aloft self-assurance and reduce volatility. Note, however, during this cycle a large down pierce in a OVX from a mid-50s in Nov 2016 to a mid-20s in February, a decrease of roughly 55%. Also note that a OVX has now incited higher, rising sincerely neatly into a mid-30s as a improvement began in aspiring final week.
Higher OVX, of course, means aloft sensitivity and as a outcome a aloft a luck of bigger cost moves. Combine that with reduce futures open seductiveness and it’s transparent that OPEC’s pronouncements are going to be descending on fewer and fewer receptive ears. – Brian Noble
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