Energy Prospectus

Saudi Arabia is reportedly considering pausing the already agreed to production increases

> That would be a hoot after Biden begged for more oil a few weeks ago.

https://www.zerohedge.com/commodities/b ... to+zero%29

Saudi Arabia (or just about every other country on Earth) could care less what Biden wants. There is now ZERO respect for Team Biden within OPEC+.

ZeroHedge: A bullish setup
As we just discussed, large speculators and particularly systematic funds have dramatically reduced their “long” oil futures exposure in recent weeks. In fact, the combined net managed money position for ICE Brent and Nymex WTI is now looking quite low by most metrics, and especially in light of the still strong positive roll-yield currently implied by the forward curves. As we have explained in past notes, roll-yield is a very powerful force in commodity futures markets and, as such, speculative positioning tends to be strongly correlated with this implied yield.

Moreover, trading against this yield in either direction can be a challenging task that is often advised against without a compelling counter-argument. Nonetheless, short-term CTA-style momentum and trend funds have likely been building “short” positions this week on price alone, but this bearish stance is likely to be short-lived, as we see it. After all, it is only the short-term signals that have flipped and while the medium-term momentum is at risk for some oil contracts, the long-term signals are still firmly in the bullish camp. For these reasons, we see the recently established “shorts” as vulnerable given they are trading against both the powerful implied rollyield as well as the well-established longer-term trend. These new “shorts” are also at odds with the current inflationary concerns that are underpinning the revival in commodity index investing.

So in summary, we are viewing the current light speculative oil positioning as providing a bullish setup for oil prices, given the bullish fundamental and macro backdrops, as there is plenty of dry powder at hand to bid oil prices higher in the coming weeks and months. If oil prices do grind higher, as we expect them to once the waves of mechanical selling subsides, then these same funds will ultimately be forced to cover their oil futures “short” positions and initiate new “long” positions at higher prices. For these reasons, we see the recent washout in oil exposure as temporary and more importantly, the reduction in length provides a bullish setup into year-end.

Looking Forward
Looking forward, we see oil prices strengthening into year-end despite the recent washout of systematic traders. Further to that end, the reduction in oil exposure by large money managers is setting the stage for a potential “short” covering rally to ensue, especially given the news that Saudi Arabia could pause or slow the pace of the planned production increases into year-end. In addition to any potential surprises from OPEC+, the strong forward curve structure is a major headwind for the oil-bears. In fact, when you look at the deferred oil contracts, the Dec-22 Brent contract is fast approaching the $60/bbl level. To our minds, that looks like a much better buy than sale in the current inflationary environment. As we mentioned in a recent note, US oil producers are already seeing meaningful inflationary pressures in their drilling budgets which is only increasing the cost of production and thereby supporting the back of the curve.