In a world full of geo-political risk, can we take some comfort that at least one dangerous hotspot may cool down? Former basketball star Dennis Rodman is on his way to North Korea to open a dialogue with his buddy North Korean leader Kim Jong-Un. Maybe Dennis can explain to him that nuclear war may not be in his best interest. Crude oil traders can now rest easy. We’re all so relieved.
Energy traders can also rest easy about the tension with Qatar because both Saudi Arabia and Qatar would not impact their oil production cuts in any way. In fact, the Saudis want to make it clear they are serious about doing whatever it takes to get the global oil market in balance. Reuters reported that Saudi officials now say they are making real cuts, including 300,000 bpd to Asia for July, although several Asian refiners said they were still receiving their full allocations.
Reuters is also raising concerns about the U.S. shale producer that is says is vulnerable to falling prices as their oil hedges run out. “According to a Reuters analysis of hedging disclosures by the 30 largest U.S. shale firms, most stayed on the sidelines in the first three months of 2017, a stark contrast from a year ago when firms rushed to lock in prices, even though oil was trading $15 a barrel lower.”
Compared with a year ago, the group is more exposed to falling oil prices, with one-fifth fewer barrels hedged, or the equivalent of 28 million barrels, and three times more barrels rolling off, or the equivalent of 38 million barrels. In total, 18 companies reduced outstanding oil options, swaps or other derivatives positions by a total of 49 million barrels from the fourth quarter to the first quarter, the data shows. Another 10 companies increased their hedging positions by 91 million barrels; two others did not hedge at all.
So, if we do see prices start to fall, we will see the possibility of more bankruptcies and a slowdown in U.S. rig counts and ultimately U.S. production.
Oil traders were emptying storage in recent months but the building contango is making them re-think that strategy. It seems the market is pricing in a tighter market in the future, encouraging storage of oil. Reuters take on this is it, “would undermine the impact of supply cuts led by the Organization of the Petroleum Exporting Countries (OPEC), which partly aimed to force traders holding oil in storage to sell to reduce bloated inventories that have sapped global prices.”
Yet, it may also cause a tightening of ready to use supply driving prices back up. Many people don’t remember, but in one of the biggest bull oil markets in history we were in a constant contango. We will have to see if the market takes this development as bullish or bearish.
From a technical perspective, oil is holding up well but we need to see some more excitement. Enthusiasm seems to have been put on hold mainly because we are waiting for news from the American Petroleum Institute, and The Energy Information Administration, The Federal Reserve, The International Energy Agency, well you get the idea. The market still is trying to come to grips with last week’s surprise increase in U.S. crude oil supply even though it was the first increase in eight weeks. We will stay tuned for further developments.