A Bullish Oil Market and Soaring Oil Prices See Saudi Economy Bounce Back By Tsvetana Paraskova and Tim Daiss Oil Price, Al-Jazeerah, CCUN, May 2, 2018

Riyadh, the capital of Saudi Arabia

 

Is This The Most Bullish Oil Market Of All Time?

By Tsvetana Paraskova

Money managers are overwhelmingly betting that oil prices will continue to rise in the short term as geopolitical wild cards trump concerns that U.S. shale and other non-OPEC supply growth could offset part of OPEC’s efforts to further tighten the oil market.

The longs to shorts ratio in the six major petroleum contracts rose to record highs last week—a sign that hedge funds and other portfolio managers are certain that the direction for oil prices in the coming weeks is up.

In addition, over the past two weeks, options traders have boosted their bets on Brent rising to $80 a barrel, and calls on Brent at $80 is the most crowded options trade on the ICE Futures Europe exchange, followed by call options on Brent at $70 a distant second. Options traders hold nearly 137 million barrels worth of $80 Brent call options, a 37-percent jump from two weeks ago, Bloomberg reports.

In the six most important petroleum contracts, money managers held long to short positions in a ratio of nearly 14:1 last week, compared to a 12:1 ratio at January 23, when portfolio managers held the record net long position in oil — 1.484 billion barrels, according to regulators and exchanges data compiled by Reuters market analyst John Kemp.

For the week to April 20, money managers held a net long position of 1.411 billion barrels of Brent, NYMEX and ICE WTI, U.S. gasoline, U.S. heating oil, and European gasoil—close to the record net long position from January.

In Brent and WTI only, money managers held last week the most lopsided position ever, with 15 longs for every short. Hedge funds’ ratio of long to short positions in Brent and WTI jumped to 15:1 from 13.2:1 the prior week, Kemp has calculated using exchanges and regulators data. Related: Canada’s Oil Patch To Turn Profitable In 2018

While this extremely lopsided long-short position could lead to a violent correction if and when fund managers start to liquidate some of the longs, analysts (and apparently money managers) see geopolitical risks as the key driver of oil prices in the coming weeks.

“For oil prices, the path of least resistance remains higher. Who wants to short the market in size in the current geopolitical climate?” Thibaut Remoundos, founder of Commodities Trading Corporation, which advises on hedging strategies, tells Bloomberg.

The current geopolitical climate has many wild cards.

Venezuela is collapsing and the only unknown here is how low its oil production will further plunge—and how fast it will do so. The country is holding a presidential election on May 20, which the U.S. and several Latin American nations say they will not recognize. New sanctions on Venezuela could follow, including a possible ban on U.S. light oil exports that Venezuela uses to blend its heavy oil to move it through pipelines. Even without sanctions on its oil industry, Venezuela will continue to lose dozens of thousands of barrels per day of oil production each month, analysts say.

Iran is another wild card—May 12 is the deadline for U.S. President Donald Trump to decide whether to waive sanctions on Iran as part of the nuclear deal. Analysts diverge on the probability of re-imposition of sanctions on Iran, the actual impact on Iranian oil exports, and whether a potential loss of Iranian oil barrels has already been priced in.

Yet, this is a wild card looming over the oil market, and it’s one of several in the Middle East, with possible escalation of the conflicts in Syria and Yemen also adding to the geopolitical premium risk.

This quarter, and particularly the month of May, has a lot of geopolitical supply risks, including in the Middle East, North Africa, West Africa, and Latin America, according to Eric Lee, a Citi energy strategist. If supply risks materialize, money managers—with their near-record longs—may be well-positioned for the upside, but if a bearish catalyst kicks in, there could be sharp moves down, Lee told Bloomberg.

OPEC’s drive to push up oil prices and keep them high creates a pressure that in 2019 supply growth could be much more than anticipated, Lee noted.

Related: Saudi Arabia’s $100 Oil Dilemma

OPEC’s de facto leader Saudi Arabia “is going to the whip to try to get prices higher”, John Kilduff, founding partner at Again Capital, told CNBC last week, commenting on the reports that the Saudis are pushing for oil at $80-100. Saudi Arabia is capitalizing on their own production restraint, help from other non-OPEC producers, robust global demand, and a “total mess” in Venezuela, according Kilduff.

“Now the Saudis are really again going for the jugular here and trying to goose the price higher,” the strategist said, warning that higher oil prices will not only spur more U.S. shale that will hedge to lock in much higher prices, but will also incentivize deepwater U.S. and deepwater Brazil, for example.  

Although geopolitical risks and bullish oil demand growth projections currently outweigh bearish factors, if money managers start to exit the extremely overstretched longs, the rally could come to an abrupt end.

https://oilprice.com/Energy/Energy-General/Is-This-The-Most-Bullish-Oil-Market-Of-All-Time.html

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Soaring Oil Prices See Saudi Economy Bounce Back

By Tim Daiss  

Saudi Arabia’s success in leading both OPEC and non-OPEC production partners in reigning in record high OECD oil inventories amid the group’s ongoing oil output cut is starting to pay off for Riyadh.

In a report late last week BMI Research said that the Saudi economy is poised to grow by 1.6 percent this year amid a rebound in oil prices and an easing of fiscal austerity.

“The Saudi economy will recover in 2018, as continued gains in oil prices support the government’s move towards a more expansionary fiscal policy in turn boosting consumption in the Kingdom,” BMI said in its report.

However, the introduction of a new 10 percent VAT on private sector activity will be a drag on the country’s private sector for the first half of the year, the report added.

Yet, despite its efforts at pivoting the economy away from overreliance on oil revenue, the Kingdom remains an oil-based economy. Shipments of oil account for 87 percent of total exports and around 46 percent of GDP.

Propped up by oil price hikes

Global oil prices have trended upward this year from dipping below the $30 per barrel price point in early 2016 to now hovering in the mid-$70s range for global benchmark, London-traded Brent crude, with the likelihood that prices will breach the $80s mark in a few weeks if President Trump levels fresh sanctions against Iran, OPEC’s third largest producer. New sanctions could remove up to 800,000 barrels per day (bpd) of Iranian crude from global oil markets, further tightening global oil supplies as demand and consumption increase, resulting in even higher prices.

Saudi Arabia indicated late last week that it would even be content with oil prices reaching up to $100 per barrel, though at that price, since oil is a fungible commodity demand destruction would likely set in as both consumers and industry would seek alternative fuel sources to replace higher priced oil. If demand destruction enters, an ensuing slump would develop - something the Saudis should be cognizant of and a market dynamic seen in 2007/08 and again in 2013/2014.

Standard Chartered last week revised its oil price forecast for 2018 up by $10, stating that the market has begun to acknowledge the importance of OPEC-led production cuts. It’s the first time in almost a year the bank revised its oil price forecast. For 2019, the bank raised its forecast by $13, with Bent prices at $75 per barrel and NYMEX-trade West Texas Intermediate (WTI) at $72 per barrel. Related: The Next Big Threat For Chinese Oil Demand

“OPEC and its non-OPEC partners are now receiving greater acknowledgment for market discipline, views of shale oil economics are no longer the most important price-setting factor, and demand pessimism is significantly reduced,” the bank said.

The BMI report and Standard’s updated forecast are both good news for Saudi Arabia who started running record high budget deficits in 2015 as oil prices plunged from over $100 per barrel in mid-2014 to multi-year low’s that forced Riyadh to enact unpopular austerity measures, as well as issue bonds on international markets.

Saudi Arabia issued its first international bond sale in 2016, the largest for a developing economy, raising some $17.5 billion, to help offset the impact of low oil prices on state coffer. Last week, the Kingdom also issued an $11 billion international bond issue to cover its hard currency funding needs for the year, its fourth international bond, in tranches of seven, 12 and 31 years, attracting massive investor orders of $52 billion, according to a Reuters report.

OPEC/non-OPEC producers are slated to meet in Vienna on June 23, a day after an OPEC only meeting. A technical committee monitoring a deal to cut oil output between the OPEC and non-OPEC producers led by Russia will meet on June 19.

https://oilprice.com/Energy/Energy-General/Soaring-Oil-Prices-See-Saudi-Economy-Bounce-Back.html

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