Why is WTI up today? - Nov 4

[dan_s]

Notes below are from 22V Research with my comments in blue.

OPEC+ has decided to postpone its slow restart of idled crude oil production capacity by at least another month. This is the outcome embedded in our base case. It is the logical action, though we expected the announcement to come a couple days after the U.S. elections not a couple days before.

This deferral is not, however, the course of action expected by most institutional investors.

Their books are positioned just 96 thousand contracts net long in NYM WTI crude oil, down from 141 thousand a month ago and 153 thousand contracts a year ago, according to the latest CFTC data. Likewise, in the ICE Brent crude oil market, institutional investors own just 94 thousand contracts of net length, or less than half their net length a year ago (200 thousand contracts).

As a result, prompt crude prices have advanced by three percentage points following the decision on another round of short covering from this group. Intraday this morning, prompt WTI is now fetching around $71.50. Prompt Brent is trading above $75. Those advances add to the bounces we have seen since last Monday when we flagged $67 WTI as a tactical buy (Oil prices weigh three absences, 28-Oct-2024). < $67 is now a strong level of support for WTI and $70 is a strong support level for Brent.

These $71-$75 prompt crude prices in turn raise the same question we posed and answered in our 22V Friday Webinar three days ago (Nov 1): now that spot crude oil prices have advanced by 6% in seven days to the levels that are consistent with our 2024 yearend base projections, should we want to shift from net long in crude oil back to flat or even net short through yearend?

Our short answer is no. We want to stay net long.

Risk skew in the petroleum complex is still to the upside on that short time horizon. The probability of sub $65 WTI at end of 2024 has dropped to 28%. The most likely outcome remains a price that lands between $65 and $80 (47% probability). Our work shows a 17% probability that yearend spot price lands between $80 and $90, and 9% odds for above $90. < As discussed in my newsletter, I believe the "Right Price" for WTI is within a range of $75 to $85. If the war between Israel and Iran does escalate or if Trump becomes the next president and shuts down Iran's exports, the price could go up to $90.

With Jan-25 NYM WTI now trading around $70.90, an advance to $73 would mark another +3% return for the long investor within the next eight weeks. An advance to $75 from the current cost basis would mark a return of +5.8%. Reaching $80 would yield a +12.8% return in less than two months.

Meanwhile, an even more attractive risk-reward lies in nearby gasoline, where Jan-25 NYM RBOB is at 200 cents per gallon. A strong bullish seasonal for gasoline demand and spot gasoline price is usually triggered by the U.S. Thanksgiving Holiday, which lands on Thursday Nov 28 this year. A move in spot price from 200 cpg to 220 cpg in December would be consistent with historical experience.

Our base case has expected and continues to expect three near-term bullish catalysts for oil to arrive in the first half of November: (1) receding political headwinds against gasoline following the U.S. elections on Nov 5, (2) deferral of OPEC+ crude production restarts (Nov 8-10), and (3) an increase in IEA’s 2024 global liquids demand estimate to be more consistent with its own data on stronger-than-modeled draws on global oil inventories (IEA’s next monthly oil report is due to be published on Nov 15). < IEA has a long history of underestimating oil demand.

We now have one of the three catalysts in hand (OPEC+). Completion of the U.S. elections tomorrow will bring a second. The third (potential IEA bullish demand revision) is now eleven days away.