It is so interesting to me to observe sentiment in the market and how people interpret the data available to them. I grew up massaging the data and presenting it using various statistical methods. One of the reasons I love stats is that one can derive to two totally different stories having the same data so it’s very easy to show what one wants to show but on the other hand it’s just as easy to see only the things one want to see.
In this post let me present you some oil related facts by how I see it and I hope I will be able to present it from the most neutral stance possible.
As I started with the sentiment, let me continue with it. While some people might want to convince you sentiment is bullish I have to disagree. Most of the people I follow on twitter are very bearish, some calling for oil to fall below $40 level and some even to $30 or lower every time the market dips, and the traders who are not as bearish think that there is no way that oil can trade higher in the next couple of months. While I don’t exclude prices to fall, I was taught that there are no certainties…
Bearish traders also refer to COT positioning pointing to how bullish the sentiment is. Is it really? Hedge fund positioning, adjusted by open interest, is positive but just barely above 10 year average.. so pretty much neutral, right?People also like to refer to producers as a group who should be the most informed in the market. So, why is then nobody pointing out the fact that they have started reducing their short exposure and why are they doing this if everything is so bearish?
On another note, some people are suggesting that shale producers’ break even prices, as a consequence of low oil prices, reduced significantly and are maybe somewhere in $30-40 range. If this is the case, why were producers hedging so aggressively between $50 and $55 range (WTI contract) and not lower as well? What if this is suggesting that break even prices are much higher, closer to their hedging range? And what if oil price moves above this range and producers decide to stop hedging at all?
Not only sentiment, but fundamentals are gradually improving. From Ole’s tweet below we can see that inventories of crude oil and products are falling.
— Ole S Hansen (@Ole_S_Hansen) August 16, 2017
While so many people believe that shale production will keep increasing over the following months, I don’t buy this. First, they have to drill more just to maintain the current production levels and second, how much investment was there in the last two years at these not so ‘boomy’ prices to add new rigs and not only finish the unfinished ones and to replace the old ones?
Before finishing off with some technicals, let me say something about the demand. What if we see a demand surprise to the upside? This would be some of a surprise for many people as no one is expecting this!
We already can see some demand upticks in other, less exposed, energies for example in European energies. Please read my post about them here. And if the dollar keeps depreciating (read my views about it here), oil prices in local terms in Europe, China and other places will remain discounted because of the currency moves.
So, let me show you Brent prices in EUR. It is turning higher from a crucial support..
…and the chart looks very similar in CNH.
All of this is also reflected in CAD move. CAD usually leads oil price and if this is the case this time as well, we should expect a very aggressive move higher in oil soon. On the chart the upper line is CADUSD and lower line is WTI price.
Let me finish with the weekly chart of Oct17 contract in WTI. While the price stays above $48 or this weeks’ low at $46.70, I think there is no reason for me to be bearish and price remains constructive for the bullish case.
I would like to conclude by saying few words about what would have to happen to change my mind. As mentioned above, the price in $ terms would have to trade below $46.70 and dollar would have to start rallying very aggressively. This would probably have to coincide with a total crash (please read my views about the equity market here) in the equity market and the economy as a whole, so in this case oil demand would probably collapse. But for now I don’t believe in this worst case scenario, because I would expect “the plunge protection team” to jump in and try to save the world. Let’s see…