Energy Prospectus

Comments below are from John Kemp who writes for Reuters. John is based in London and he sends out daily updates.

October 4, 2018: John's "take" from London
"In reality, U.S. sanctions, output restrictions by OPEC and its allies, strong consumption growth and position building among the hedge funds have all contributed to the (recent oil) price surge.

Aggressive implementation of U.S. sanctions on Iran has left refiners and traders concerned about the future availability of crude and questioning whether OPEC will still have enough spare capacity to offset any other losses.

OPEC and its allies became fixated on cutting oil inventories down to the five-year average and waited far too long to start exiting from production curbs, causing the market to overtighten.

And oil consumption has grown much faster than most analysts forecast at the start of the year, while many non-OPEC sources of supply have risen more slowly than expected.

Despite communications between policymakers in the United States, Saudi Arabia and Russia to synchronise output increases with the re-introduction of sanctions there seem to have been a series of misunderstandings.

Policymakers appear to have misjudged how quickly the United States would try to cut Iran's exports and how rapidly other OPEC and non-OPEC producers could fill the gap.

Sensing the market is moving into a cyclical period of under-supply and low spare capacity, hedge funds and other money managers have built bullish long positions, accelerating and exaggerating the price adjustment."
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MY TAKE: Oil price cycles always overshoot the mark on both the downside and the upside. $70 to $75 feels like the "right price" for WTI to me, but my guess is that it will go much higher by year-end, primarily because the sanctions against Iran are working and President Trump is going to "put the hammer down" on the country which supports terrorism all over the world. Wouldn't it be nice if the civilized nations of the world would stick together and send a clear message to the leadership of Iran, North Korea, etc that we will no longer tolerate their tribal crap."

More from John Kemp:

"The oil market has become locked in an upward price trend as hedge funds and market makers all try to maintain neutral or long positions and few speculative players are willing to take the short side of the market.

Hedge funds and other money managers have accumulated bullish long positions betting on a further rise in prices amounting to almost 1.2 billion barrels of oil.

At the same time, the number of short positions in the six most important petroleum futures and options contracts has fallen to its lowest level since before 2013.

The imbalance between bullish and bearish positions is close to a record, an analysis of regulatory and exchange data showed.

Lopsided positioning has often been the precursor to a sharp reversal in the price trend when fund managers attempt to realise profits by closing some positions.

The impact of lopsided positioning on the evolution of prices has been explored by researchers including the physicist Didier Sornette ("Why stock markets crash: critical events in complex financial systems", 2017).

But while lopsided positioning is a key signal for a future price reversal it does not indicate how quickly that reversal will take place and at what price level it will occur.

In 2007/08, oil prices continued trending higher for some months, even as analysts warned they had become unsustainable.

Oil prices tend to overshoot on the upside (2008 and 2011) just as they have done on the downside (1998, 2009 and 2016) before correcting.

Typically, prices peak only once there is clear evidence of a slowdown in oil consumption growth and/or OPEC producers come under intense political pressure to increase production.

In the meantime, oil prices have risen to a level that is sending a strong signal to non-dollar consumers about the need to increase efficiency, reduce use and switch to alternative fuels."