Oil Price - Sept 24

[dan_s]

Trading Economics:
WTI crude oil futures rose above $72 per barrel on Tuesday morning, recouping losses from the previous session as the prospect of supply disruptions outweighed concerns over sluggish demand.
> Increasing tensions in the Middle East have heightened fears of a broader conflict in the key oil-producing region, following Israeli strikes on Lebanon on Monday, the deadliest attack since the 2006 Israel-Hezbollah war.
> Investors are also monitoring the risk of a potential hurricane strike in the US Gulf Coast, which could impact crude output later this week.
> Additionally, China announced a series of stimulus measures to support its economic slump, easing some concerns over sluggish demand from the world's top oil consumer.
> Meanwhile, the eurozone reported an unexpected decline in business activity, with services stagnating and manufacturing worsening, amplifying concerns about the outlook for the region’s energy demand.

HFI Research note this morning:
"For the week ending September 20, we have a crude draw of 8.62 million bbls. Relative to the 5-year average build of 0.593 million bbls, this draw will be considered bullish. If EIA reports something similar, US commercial crude storage will fall below ~410 million bbls."

Comments below are from a highly respected energy market analyst:

For more than three months, institutional investors have been actively on guard for a price flush in crude oil. Some have worried about the risk of a demand collapse in a global recession; some have focused on OPEC+’s now-deferred pledge to return more than 2 million b/d of idled production capacity. Others wonder what would happen to crude prices if peace suddenly arrived in the Middle East and/or Ukraine.

These are all eminently reasonable risk questions of course. But over the past seven weeks, investors’ bearish sentiment has reached previously unseen extremes. This negativity stands in obvious contrast to the net risk perception of commercial producer and consumer hedgers in the Brent market (first chart below). This chart does not mean that investors are wrong. It does mean that their perception appears at serious odds with most likely reality. This anomaly warrants scrutiny.

Two weeks ago, institutional investor positioning in ICE Brent crude oil futures and options slumped to the first collective net short in at least 18 years, validating our January 2024 prediction that this novel event would occur in this calendar year. In the event, on the day it happened we assessed it as a near-term buy signal and discussed this idea with many of you readers on that day.

The price and fundamental data support this call. Though investors continue to fear the worst, their positioning is now starting to turn back toward the long side. In fact, subsequent traders’ open interest data through Sep 17 show institutional investors are now essentially square on their gross risk in ICE Brent futures and options (50% long).

According to ICE Brent crude oil data for the week ending Sep 17, institutional investors sold short an additional 8,585 contracts across futures and options but also added 13,124 contracts of risk on the long side. The net effect took the group’s collective net position from –12,680 contracts to –8,141 contracts.

Gross risk is now virtually unchanged year on year in quantity terms at 1.167 million contracts, though net positioning has swung by 273,672 contracts from the long side toward the short side over the past year. Looking forward, be aware that significant fuel is now in place for shortcovering to propel crude oil futures prices higher. Consider this fact: institutional investors now hold 588 million barrels short at $73.70 per barrel prompt equivalent. The comparable figure for a year ago is 450 million barrels short at $94.43 prompt equivalent. That’s a 30% larger position at a $20 delta against. Tough odds to win when marginal cost of capex is still somewhere between $65 and $67 and the true “demand destruction” price for retail gasoline is north of $210. Watch the refiners.

Across the NYM WTI crude oil futures and options markets, institutional investors are now running 1.317 million contracts of gross risk (+125K YoY) as of Sep 17. DO NOT OVERLOOK THE FACT THAT THE PHYSICAL PRICE OF BRENT CRUDE OIL IS NOW TYPICALLY SET BY THE PHYSICAL PRICE FOR WTI MIDLAND CRUDE IN A RULES CHANGE MADE LITTLE MORE THAN A YEAR AGO. In the week ending on Sep 17, institutional investors in NYM WTI covered 44,941 contracts sold short and trimmed 16,740 contracts of length. These adjustments brought institutional investors’ net length to +133,225 contracts (55% long). This is not a raging confidence to sell WTI.

Though the risk perception indices we track suggest investors have become too defensive on legitimate concerns, in fairness we do note the tightening behavior of the term structure in the NYM WTI crude oil futures curve (second chart below). Even as our long V4X4 and X4Z4 timespread trades have been profitable this month, the backwardation in the M1/M24 term structure we deem most relevant for equity investors has halved while realized volatility has increased by 75 percent.

In plain English, we still describe this setup as “tracing the bearish edge of a bullish regime“. What this means is while we believe investors will want to own crude oil futures and options, translating that commodity bullishness into equity positions will remain challenging, especially if associated E&P firms are largely operating in the U.S. Midcontinent where the invisible hand is pricing to curb marginal capex. This is one reason why we think equity investors will find greater love in the North American midstream (our Conveyor Belts thesis).