Views from Wall Street on oil market volatility

The Oilholic finds himself 3,460 miles away from London in New York, with Wall Street giving the crude market yet another reality check. In the last few months, money managers of all description, not just our friends in the hedge fund business, are scratching their heads having first seen a technical bear market in July, only for it to turn in favour of a technical bull market in August!

But now, with all that phoney talk of producers coming together to freeze oil production having fallen by the wayside, both Brent and WTI have started slipping again. 

Not one Wall Streeter the Oilholic has spoken to since arriving in the Big Apple seems to discount the theory that oil may be no higher than $50 per barrel come Christmas, and even that might be a stretch. 

In a desperate bid to keep the market interested in the production freeze nonsense, the Saudis and Russians pledged cooperation ensuring "oil market stability" at no less august a venue than the G20 summit in China earlier this month. Of course, as no clear direction was provided on how that "stability" might actually be achieved and nothing revealed by way of production alterations or caps, not many are quite literally buying it – not on Wall Street, not in the City of London.

Forget the shorts, even the longs brigade have realised that unless both the Saudis and Russians, who between them are pumping over 20 million barrels per day (bpd) of oil, announce a highly unlikely real terms cut of somewhere in the region of 1 to 1.5 million bpd at the producers’ informal shindig on the sidelines of International Energy Forum (due 26-28 September) in Algiers, price support would be thin on the ground.

In fact, even a real terms cut would only provide short-lived support of somewhere in the region of $5-10 per barrel. As a side effect, this temporary reprieve would boost fringe non-OPEC production that is currently struggling with a sub $50 oil price. Furthermore, North American shale production, which is proving quite resilient with price fluctuations in the $40-50 range, is going to go up a level and supply scenarios would revert to the norm within a matter of months.

A number of oil producers would substitute the hypothetical 1-1.5 million bpd Riyadh and Moscow could potentially sacrifice. That’s precisely why Wall Street is betting on the fact that neither countries would relent, for among other things – both are also competing against each other for market.

Another added complication is the uncertainty over oil demand growth, which remains shaky and is not quite what it used to be. Morgan Stanley and Barclays are among a rising number of players who think 2016 might well end-up with demand growth in the region of 625,000 to 850,000 bpd, well shy of market think-tank projections of 1.3 million bpd.

Trading bets are mirroring those market concerns. Money managers sharply decreased their overall bullish bets in WTI futures for the week to September 6th, and also reduced their net position for a second straight week, according to Commodity Futures Trading Commission (CFTC) data.

In numeric terms - "Non-commercial contracts" of crude oil futures, to be mostly read as those traded by paper speculators, totalled a net position of +285,795 contracts. That’s a change of -55,493 contracts from the previous week’s total of +341,288; the net contracts for the data reported through August 30th.

The speculative oil bets decline also dragged the net position below the +300,000 level for the first time in nearly a month. That’s all for the moment from New York folks, as the Oilholic leaves you with a view of Times Square! Keep reading, keep it ‘crude’! 

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To email: gaurav.sharma@oilholicssynonymous.com

© Gaurav Sharma 2016. Photo 1: Wall Street & New York Stock Exchange, USA. Photo 2: Times Square, New York, USA © Gaurav Sharma, September 2016