Phil Flynn is writer of The Energy Report, a daily market commentary discussing oil, the Middle East, American government, economics, and their effects on the world's energies markets, as well as other commodity markets. Contact Mr. Flynn at (888) 264-5665
The petroleum buyers are gone, unless you are talking oil call options, as supply and demand take a back seat to rising macroeconomic fears. Maybe the buyers of oil have been taken away from the mother ship or maybe they have just ridden off into the sunset, but the reality is we are seeing a short oil position of epic proportions as the market seems to remove the risk of ever rising again. Regardless, crude oil is trying to hold support. It is a tenuous hold after what could be called a failed treasury auction yesterday and talk from Fed Chairman Jerome Powell that the rate hikes might not be over just yet.
Based on yesterday’s auction yield, the Fed may have to offer much higher rates to get people interested in buying our paper. Underneath it all, the crash in the price of oil is either a very ominous sign for the state of the global economy or a sign that it is being driven by fear and not on supply and demand fundamentals. The oil market swing in mood has gone from pricing in the biggest threat to global oil supply since the Arab oil embargo 50 years ago to almost a record short position in the history of the oil futures markets.
Oil market guru Pierre Andurand pointed out that, “Net long speculative positioning in oil (crude products, options delta futures) is fast approaching the lowest since this data exists (2011). The managed money category in the COT (representing hedge funds) sold about 400 barrels in the last 6 weeks. He asks, “What drives this selling?” He says, “Hard to identify a clear reason. There have been macroeconomic worries for a while now. However, demand growth has consistently been revised up during the year, and mobility data shows an acceleration in demand and demand growth. Some point to softness in the physical market.
Part of it can be explained by OPEC+ exports going back up since August. But this is largely because they overshot to the downside in August, and they seasonally go back up in September and October. It is not a sign of Opec+ cheating according to Andurand. Today the latest data from OPEC shows an expected seasonal rise of 180,000 barrels by the OPEC cartel. The increase was led by Iraq and Iran which seems to have no fears that the US or the world will have the guts to enforce oil sanctions on the Iranian regime.
As we reported yesterday, Saudi Arabia was blaming speculators for the sell-off and price and based on the amount of hedge fund shorts, they might have a bit of a case. Yet at the same time, we can almost be assured that because of the price drop OPEC Plus will extend their production cuts into the new year and beyond. We can also speculate that if Saudi Arabia believes that the market is being unfairly manipulated by speculators, they may move like they did before and add production cut to teach those darn speculators a lesson. Maybe another lollipop production cut perhaps.
But perhaps more key is Russia’s commitment to production cuts. Energy Intelligence reported that Russia made clear that their vow to cut production includes cuts of refined products as well. They said that, “The wording of Alexander Novak’s statement was nearly identical with previous ones. This time though, it specified that Russia’s 300,000 barrels per day voluntary export cut would include “crude oil and petroleum products.” Before, Moscow used to say it would reduce “oil supplies.” Russia also is blaming Europe for the coming energy crisis, even though it was Russia that laid the trap for an unsuspecting green energy-fixated Europe.
Reuters reported that, “Russian Foreign Minister Sergei Lavrov accused the West on Wednesday of provoking crises in the global oil and gas market by rushing to switch to green energy and imposing pressure on other countries to do the same. “In fact, the reasons for the negative phenomena in the energy sector were the irresponsible actions of the collective West, when it decided to force … the green transition for itself and impose the same green transition on other countries that were simply not economically ready for it,” Lavrov said in televised comments.He said, “Western boycotts of Russian energy in response to the war in Ukraine had dealt a serious blow to global energy security. These steps led to the rupture of historical value chains, costly redistribution of global energy flows, and rising transaction and logistics costs.” Well, when he is right, I guess he is right.
Oil is undervalued by at least $10.00 a barrel and should be close to its low. Technically we are still vulnerable and because this move is based on money flows, take an abundance of caution. The $75 area needs to be held, or we could test $73 but be on guard for a V-shape recovery. As hard as we fell, we could snap back in an instant because we had too many folks on one side of the boat. That means the global economy is either facing the same fate as the Titanic or we could see a massive short-covering rally with just one headline.
That is why we saw near-record call buying in some option spreads that may be a hedge against shorts or just a realization that the calls have been squeezed so hard that they are an exceptional value. Assuming the market can go back up. It’s almost like the call options are priced like that can never happen and if they are wrong, call options are the best investment bargain around.
Natural gas is plummeting as winter is taking a holiday. Above-average temperatures coupled with rising expectations for more production is the main reason. Associated gas production is topping off the gains and without help from Mother Nature, prices are on a downward spiral.
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