Brent Crude Spikes To Highest Since July 2015

North Korean war-talk has extended early gains for Brent Crude (driven by anxiety over the post-Kurd-referendum fallout), pushing prices to their highest since July 2015.

To the highest since July 2015...

As Bloomberg reports, Kurdish oil supplies may be in jeopardy as Turkey, Iran and the Iraqi central government in Baghdad sought to isolate the semi-autonomous Kurds as balloting began on Monday. Meanwhile, OPEC and its partners implemented more than 100 percent of their agreed cuts last month, OPEC Secretary-General Mohammad Barkindo said Friday in Vienna, providing more fuel to the oil rally.

“It’s pretty clear the Kurds are going to vote for independence and we will have yet another geopolitical hot spot in the Middle East that threatens a significant amount of oil supply,” John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund, said by telephone.

At the same time, “the cooperation and the strong effort by OPEC is registering with the market.”

Brent crude oil futures curve has moved into backwardation in recent weeks, indicator of supply tightness...

And the Brent-WTI spread reaches its highest since August 2015...

You Can Only Choose One: Cheap Oil Or A Weak Dollar

Authored by Charles Hugh Smith via OfTwoMinds blog,

When the price of oil rises to the point of pain, just remember the handy-dandy discount mechanism: a much stronger US dollar.

Glance at this chart of the trade-weighted U.S. dollar, and note the swing highs and lows in the price of oil per barrel around each peak and trough. You can look up historical inflation-adjusted prices of oil in USD on this handy chart: Crude Oil Prices - 70 Year Historical Chart (macrotrends.net)

The correlation isn"t perfect, of course. Oil was relatively cheap between 1986 and 2003, due to a relative abundance of supply as Saudi Arabia and new fields ramped up production, with two periods of extreme price action: a brief spike higher in 1990 preceding the First Gulf War, and a collapse to $17 in the 1998 Asian Contagion financial crisis.

Geopolitical crises, wars and supply shocks will move oil prices regardless of the value of the USD. That said, it"s clear that absent such shocks, there is a strong correlation between a stronger USD and lower oil prices (in USD of course) and a weaker dollar and higher oil prices.

The reason why is straightforward: if the dollar gains purchasing power against other currencies, it buys more oil for each dollar.

Conversely, when the USD weakens, its purchasing power declines and it takes more USD to buy an imported barrel of oil.

(Note that the price of domestically produced oil is largely set on the global marketplace. West Texas crude oil may be a few dollars less per barrel than Brent crude oil, but if the global price skyrockets, so does the price of US-produced crude.)

Since oil and gas are the essential resources of the industrial economy, the price paid by consumers and commercial users matter.

The one way the US can get an across-the-board global discount on oil is to push the purchasing power of the USD higher. That is an enormous benefit that few commentators ever mention. Instead, pundits talk about the benefits of a weaker dollar, which boil down to lower priced exports.

Which matters most to households and enterprises? A tiny blip higher in exports (a relatively modest slice of the U.S. economy) or lower energy prices at the pump?

If a recession were to pressure household budgets, the one sure way to lower household spending on oil/gasoline would be to strengthen the USD.

There are two basic mechanisms that strengthen the USD: raise interest rates, so global capital flows to USD-denominated debt to earn the higher yield, or a global financial crisis which causes global capital to seek the relative safe haven of the USD.

In a global crisis, liquidity and credit will dry up, and all those non-US debtors holding the $11 trillion in USD-denominated debt I mentioned on Friday will be scrambling for USD to service their debts. This will also increase demand for USD, pushing the USD higher.

The Federal Reserve insists that yields must remain near-zero or the economy will collapse. Americans paying 15% to 23% interest on their credit cards haven"t seen any benefit from near-zero rates, nor have student-loan debtors. The real beneficiaries of low yields are financiers, banks and corporations which borrow immense sums for next to nothing. (Try finding a credit card with a 1% or 2% interest rate.)

At some point, the price of oil might start mattering to households and businesses. Note that the discoveries of oil are now a thin slice of annual consumption. As the cheap oil is depleted, what"s left is the costlier-to-extract stuff.

Even more alarming, the global supply of oil might fall well below global demand, and stay there.

When the price of oil rises to the point of pain, just remember the handy-dandy discount mechanism: a much stronger US dollar.

*  *  *

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WTI/RBOB Drop After Harvey Prompts US Crude Production Collapse, Biggest Inventory Build In 6 Months

Last night"s first glimpse of Harvey"s impact on energy confirmed a sizable crude build but only modest gasoline draw. WTI/RBOB prices slid into the DOE print and extended losses (after a quick kneejerk higher) following a bigger than expected crude build (+4.58mm vs +4mm exp). Gasoline and Distilates saw bigger draws than API reported but it was the collapse in Lower 48 crude production that stood out with most of Texas offline.

API

• Crude +2.79mm (+4mm exp) - biggest build in 5 months


• Cushing +669k (+1mm exp)


• Gasoline -2.544mm (-5.2mm exp) - biggest draw in 6 weeks


• Distillates -610k

DOE

• Crude +4.58mm (+4mm exp) - biggest build in 5 months


• Cushing +797k (+1mm exp)- biggest build in 5 months


• Gasoline -3.20mm (-5.2mm exp)- biggest draw in 2 months


• Distillates -1.396mm

The inventory changes reported by the API were much smaller than those forecast by analysts. As a reminder, Saxo Bank"s Ole Hanson notes that "inventory data later is a lot of moving parts which could be quite skewed away from what we’ve seen in recent weeks." Additionally, investors “are going to be skeptical of the data,” James Williams, an economist at energy researcher WTRG Economics, told Bloomberg. “It might be pretty flaky data this week and next, so I don’t expect to see a big market-mover”

Bloomberg"s Fernando Valle notes energy"s past week was all about Hurricane Harvey as refineries shuttered, choking output and hauling down inventories of gasoline and distillates.

Bigger than expected crude build and bigger gasoline and distillate draws than API reported...

Bloomberg"s Fernando Valle points out that the increase in crude inventories was largely expected after the devastating impacts of Hurricane Harvey on the Gulf Coast. The draw on refined product inventories was weaker than expected, as lost demand -- both locally and abroad -- offset lower-than-expected refinery utilization. Investors" focus will now shift to the restart of refineries and export ports.

As one might expect, Gulf Coast imports fell to a record low.

Bloomberg"s David Marino notes that exports tumbled with Texas ports closed.

Crude was the lowest since 2014, before the export limits were lifted. Gasoline fell by more than half to 319,000 barrels a day, the least in four years, and distillate shipments were the lowest since 2011. Look for those numbers to rebound as ports and pipelines reopen fully.

Production declined in the previous week, and with most of Texas ofline last week - Crude production in the Lower 48 collapsed...

This is the biggest week-on-week fall since August 2012, when Hurricane Isaac shut in more than 1.3 million barrels a day of Gulf of Mexico production.

WTI and RBOB have drifted lower after last night"s API data, heading into the DOE data. The kneejerk reaction to the crude build, gas draw and production crash was higher prices...

But that did not last long...

Brent “reached the May high and so far it’s been firmly rejected,” says Ole Hansen, head of commodity strategy at Saxo Bank. “It’s quite significant if we are getting a decent rejection here as it could indicate a short-term top in the market”

“It’s a market that is starting to struggle to move much higher, Brent crude up to $55 is probably as good as it gets at this stage”: Hansen

WTI Tumbles To $42, Brent Below $45 As Credit Crashes

High yield energy credit markets are in trouble again, with risk now at its highest level in 7 months.

Despite this morning"s Iran-hyped OPEC bullshit and a small draw in Gasoline, it appears the reality of surging US shale production and lagging demand is weighing down oil (and gasoline) markets...

Since OPEC announced its production cut extension, the crude curve has crashed at the front-end...

Macquarie"s head ofoil & gas research warns...

• "A WHILE" BEFORE OPEC TAKES BACK CONTROL OF MARKET


• "HUGE WAVE" OF U.S. SHALE OFFSETTING OPEC CUTS

Brent crude extends drop falling below $45/bbl for the first time since November 15.

Here Are The Three Choices Facing OPEC Next Week

The last time OPEC (and Non-OPEC) member nations sat down to attempt a coordinated increase in oil prices by cutting production they succeeded... for about three months. Every since then, oil has been on a gradual declining path, boosted by a surge in US shale output and declining global demand, with WTI recently even sliding sliding below OPEC"s implicit price floor of $50/barrel. Which is why on May 25, after the failure of the first 6 month production cut, the same nations will try the same exercise, this time looking to cut output for 9 months, and hoping for a different outcome.

At least that is the general expectation. Overnight, BofA"s Francisco Blanch has released a note previewing next week"s OPEC meeting titled "OPEC: extend and pretend", and which boils down to the 3 choices faced by OPEC: maintain, curb, or hike output. For its part, BofA believes that OPEC will extend cuts and hope demand recovers. Additionally, Blanch also states that oOPEC’s goal for the oil market is to reach backwardation, not a specific price level and does not believe that OPEC will proceed with deeper cuts as this would likely mean ceding more market share to U.S. shale production.

As Blanch explains in the summary, the global oil market deficit is smaller than the bank thought (see the dramatic, 500kb/d downward revision to global demand growth in chart 2 below) and as a result the cartel is struggling to bring down global stocks. This situation presents a major challenge for the cartel, as OPEC is targeting a shift in the term structure of global crude markets and not a specific oil price band according to Blanch: the idea is to penalize forward sellers and squeeze refiners. But soft demand in India and Mexico, a warm US winter, and an OPEC crude oil production overhang from 4Q16 have gotten in the way of a good plan.  

Which brings up a question that has been floated by some (including this site) in recent days: "Why not cut further?"

 Well, according to BofA, if OPEC cuts production even more, it will likely lose additional market share to US shale and prices may not move up much more. Conversely, if OPEC hikes output, oil prices could collapse to $35/bbl, setting the cartel on an even more difficult fiscal path. In our view, most OPEC members can not afford either scenario at this point. With many member countries already experiencing large government and current account deficits at current oil prices, neither lower prices nor a permanent loss in output are appealing options.

As a result, BofA is confident OPEC will stay the course, keeping production on hold over 6 to 9 months and hoping that demand improves.

Below are some some select excerpts fromthe BofA note:

The global oil market deficit is smaller than we thought…

We updated our global oil balances last week, lowering our Brent and WTI crude oil prices for this year and next by $7 to $10/bbl on average (see The crude reality). While we still see a sizeable deficit in 2017 of 610 thousand b/d, we are now projecting a balanced global oil market in 2018 (Chart 1). The change in our projections is coming from weaker than expected demand (Chart 2) and a faster-than-expected surge in the US rig count. The joint OPEC and non-OPEC cuts agreed last December are certainly helping support oil prices this year, but US shale production is coming back too fast into 2018.

 

... and the cartel is struggling to bring down global stocks

Crucially, total OECD inventories are now declining from much higher levels, as stocks actually built from 2,985 million barrels at the end of last year to 3,025 million barrels at the end of March (Chart 3). Soft demand in India and Mexico, a warm winter, and an OPEC crude oil production overhang from 4Q16 have prevented a faster draw in inventories. This situation presents a major problem for the cartel, as it is now apparent that it will take longer to reach the 5-year average levels in OECD total oil inventory targeted by OPEC. In particular, onshore crude oil inventories remain very high in the US (Chart 4), as a tight WTI-Brent spread in 1Q17 prevented a boost in US crude exports and continued to attract barrels to US shores.

 

OPEC"s goal is backwardation, not a specific price level…

A key point to understand is that OPEC is targeting a shift in the term structure, not a specific oil price level. After all, the price level for oil will be set by the most expensive marginal barrel in the market, which is US shale for now. In fact, OPEC first set the cuts in motion to shift the term structure of the market away from contango, contributing to flatten the Brent crude oil curve at a $55-57/bbl level (Chart 5). As we previously highlighted (see The oil price war is over), Saudi revenues will likely be higher over the next 10 years if it avoids a market share war with shale and other cartel members (Chart 6).

 

…in order to penalize forward sellers, squeeze refiners

Yet the market has realized in recent weeks that forward oil prices in the $55 to $57/bbl range are too attractive for shale producers. And as the US rig count continued to surge, inventors gave up on their long positions, helping oil prices drop across the term structure in the past month. With drilling activity and productivity gains continuing to improve, there is just too much shale in the pipeline. Yet North American producers are still under-hedged (Chart 7), suggesting that the next move up in crude oil prices as we approach peak seasonal demand is likely to center mostly on near-dated crude contracts (Chart 8) and not in 2018 calendar prices.

Putting it all together, BofA says that heading into the May 25 meeting, the cartel basically faces three choices.

1. First, OPEC could cut production beyond the 1.2mn b/d agreed in December and encourage non-OPEC members to deepen the cuts.


2. Second, OPEC could increase output aggressively and restart the oil price war.


3. And third, OPEC could keep the cuts at the current levels for the next 6 to 9 months and hope for oil market demand conditions to improve.

What will OPEC do? According to BofA, "the cartel will extend the cuts and pretend everything is fine." Which likely means that as oil prices fail to rebound, next March it will be same time, same place for OPEC which will again be scrambling to find some solution to a world in which it is no longer the marginal price setter.

One Of The World's Biggest Oil Hedge Funds Just Liquidated All Its Longs

Earlier in the week we shared Pierre Andurand"s hedge fund note blame-casting his fund"s dismal drawdowns on "CTA flows eclipsing the gradual improvement in fundamentals."

The market sell-off is missing the larger picture, he proclaims.

“Market participants remain extremely focused on micro developments like US crude inventories while the big picture has been telling us a different supply story for quite some time,” he wrote. “In fact, the gradual tightening of crude oil spreads has led to the release of expensive onshore and offshore inventories globally.”

So what could be driving prices lower? Andurand looks at the algorithmic traders and places blame on their non-economic outlook for the price movements. “Without consistent and significant draws invisible onshore inventories, we remain stuck in a trendless and choppy market with CTA flows eclipsing the gradual improvement in fundamentals,” he wrote, pointing to an oddity.

Of course, the permabullish trader had a great year in 2016 (up 22.1%) as oil soared...

But, in what now seems like a moment of supreme irony, we noted earlier that "it was a very ugly night for the Andy Halls, Pierre Andurands and other crude longs" as WTI flash-crashed.

And, courtesy of Reuters" David Gaffen, we may have found one major culprit (among many we suspect) for the recent rapid collapse in crude oil prices)...

HEDGE FUND MANAGER PIERRE ANDURAND LIQUIDATED LAST REMAINING LONG POSITIONS IN OIL LAST WEEK - MARKET SOURCE

As Reuters reports,

Pierre Andurand, who runs one of the biggest hedge funds specialising in oil, liquidated the fund"s last long positions in oil last week and is running a very reduced risk at the moment, a market source familiar with the development said.

The fund, Andurand Capital is a renowned oil price bull and has been reducing its positions gradually over the course of 2017, the source said, while adding that it remained fundamentally bullish on oil.

It has been a tough few weeks for Andurand...As Mark Constantine tweeted, a few weeks ago Andurand was predicting oil prices to hit $70 later this year

But, of course, Andurand is not alone, in fact it is safe to say that virtually every other commodity trader is on the same side of the boat:

Hedge funds and other big money managers amassed a record number of bullish bets on Brent crude last month, according to the Intercontinental Exchange Inc.... having traded in a narrow range for most of this year, oil posted its biggest two-day selloff since June last week. Oil inventories in the U.S. have recently hit a record high in a sign that the massive glut that has depressed prices for more than two years is still plaguing the market. The U.S. Energy Department expects American oil production to rebound past 9.7 million barrels a day in 2018, breaking the record output level set in 1970.

Should the oil drop continue, given the massive surge in open interest, we suspect Andurand will not be the last to capitulate...

Of course the hope that the capitulation is over has sparked a BTFD off the overnigth flash crash lows... WTI back above $46...

Are Banks About To Derail The New U.S. Shale Boom?

Authored by Irinia Slav via OIlPrice.com,

Just when international oil benchmarks are sliding down, banks are preparing to review the credit lines of U.S. E&Ps. Starting in April, lenders will reassess companies’ creditworthiness on the basis of reserves, production trends, current prices, and future prospects for the industry, among others. Should anything spark worry, banks will be quick to start reducing their exposure, cutting credit lines and arresting producers’ recovery at a crucial point.

This year, U.S. E&Ps have announced an overall spending increase of $25 billion from 2016, an 11-percent rise, as a clear sign of continuing optimism after the November OPEC-non-OPEC deal that aimed to shave 1.8 million barrels of crude off daily global supply.

Besides boosting spending plans, producers have been adding rigs at a respectable pace: at the end of last week, active oil and gas rigs in the United States totaled 789, an increase of 313 over a year ago. They are also investing in more efficient drilling technologies, aiming for ever lower production prices in the aftermath of the oil price crash.

The banks could put a stop to all this if they deem the outlook for oil prices or any other element of their assessment methodology unfavorable. For oil prices, more bad news seems to be on the way if we are to trust Goldman Sachs.

The investment bank said in a note yesterday that record-high investments in 2011-2013 could start bearing fruit this year and the next two, adding around a million barrels of crude to global daily production on an annual basis in the period 2017-2019. That will only happen if the mega projects that swallowed the huge investments deliver as expected, which is by no means certain.

This message contrasts with an earlier one, contained in another note to investors, which saw global oil supply tightening thanks to the OPEC deal. In fact, at the time – a month ago – Goldman was of the opinion that the draw in global stockpiles would completely offset the rise in U.S. shale output.

But for now, Brent crude is now trading below $51 and WTI has dropped below $48 a barrel. Investors are watching OPEC again for a possible extension of the production cut deal, but it’s still uncertain if it will happen, and even if it does, no one knows what the effect of an extension would be.