More interesting comments from RBC Capital - Apr 3

[dan_s]

Oil Market in 60 Seconds: Players Wanted
Views & Sentiment From Recent Marketing Tour

Given the level of macro fragility and oil price volatility, we took the opportunity to hit the road last
week to survey the sentiment landscape. Following several days of marketing with commodity
traders, generalist and specialist long only equity investors, dedicated energy equity hedge funds,
hosting cross asset roundtables and attending industry events, our main takeaway from the
whirlwind week is simple: The oil market needs more players on the field.

 Commodity traders: Slight constructive tilt. The few bears we encountered had higher conviction
than the bulls. Fear of the macro unknown remains the biggest impediment to initiating new length.

 Long Only Equity Investors: The most constructive and undeterred of the group. Longer term time
horizon, head down and ride out the noise. Strong views, strongly held.

 Energy Equity Hedge Funds: Moderately constructive. Strong views, weakly held.

What does this mean? Macro investors are either wounded, have little additional dry powder, or
have higher conviction elsewhere in the market. Macro and generalist investors used our
discussions as a proxy for their broader macro process rather than looking for a more surgical way
to deploy risk in the oil market. We are not expecting significant risk from this group to emerge over
the near term. Most commodity traders remain constructive, but the level of conviction has been
diluted meaningfully over the past month. Risk deployed has been significantly reduced. We
received little pushback on our recent balances and price view, but the comment often shared was
that “the oil trading community agrees that balances should tighten, but few of us are specialists in
market contagion and the fear of additional macro skeletons means that our fear factor currently
outweighs the greed”. In short, we know what we know, but we don’t know what we don’t know.

While today’s surprise OPEC+ cut helps to tighten balances, it doesn’t necessarily de-risk the fear
of the macro unknown. That said, net-net, today’s announcement of sizable output cuts should put
more players on the field and catalyze a leg higher in pricing, at least over the near term.

The greater the passage of time without further macro contagion, the more comfortable the market
becomes that oil prices can normalize and trend higher. That said, the impetus for investors to add
length was fleeting well before the recent banking crisis. The ratio of managed money longs to
shorts averaged 2.9x in the month leading into the SVB fallout vs current levels of 2.1.

Much of the recent rally last week was a function of short covering rather than initiation of fresh
length. Friday CFTC data indicate that the investor short position was reduced by 35%
WoW, and length was trimmed, meaning that the recent push higher was a short covering rally.

What can kickstart further length (or put more players on the field)? Followers of our work will
know that we prioritize fundamentals over technicals, but the comment often shared was that the
bounce in the oil tape from recent lows over the past week may activate CTAs to pile into the
momentum trade and project front end prices higher. Thus kicking off the tape chase for
fundamentally driven commodity traders who were looking for reasons to lean in long anyway
(putting more players on the field). Given late week price action, one can argue that this has kicked
off, to a degree, over recent days and the OPEC headline is certainly a momentum shift.

The bears put a greater likelihood on the return of Iraqi exports (400 kb/d) than a resolution to the
French refinery strikes (900 kb/d). This has proved correct given the weekend headlines suggesting
the resumption of Iraqi oil exports this week. The bears will likely lighten the tone on refinery strikes
given the OPEC+ cut, but likely to retain the view that the hit to demand could be protracted.

Commodity traders were receptive and engaged on our recent high conviction work on the
avalanche of new refinery capacity additions over the next two years, resulting in term crack
compression. Dedicated long/short equity hedge funds largely see this coming as well, while size
and slippage in timing was the debatable point of these discussions. Outside of a few, we found
that long only investors remain focused on the short-term product deficit and energy security
narrative rather than focusing on the cyclicality of the refined product landscape.