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Nigh on a week after OPEC called for a meaningful output cut, oil markets are pricing in at least a much tighter demand/supply balance. However, ahead of the weekend's OPEC/non-OPEC gathering issues remain as to planned vs actual outcomes.

  • Big oil move since OPEC flattens both Brent and WTI curves - front end significantly higher.

 

Brent forward curve

 

  • Aggregate Brent open interest has held just under immediate post-OPEC meet steep increase. That for WTI is a record high.
  • Options skews from Feb17 onwards side with OTM puts, but this could be reflection of hedging as well as scepticism all the agreed cuts plus non-OPEC are forthcoming.
  • Part of WTI curve in backwardation as US producers use forward curve to hedge and lock-in $50-plus. For some firms $55-plus is highly likely.
  • Latest & pre-OPEC CFTC, indicates US producers raising shorts, but Brent peers cutting.
  • This WTI hedging raises probability of higher output from US next year and could also leave country as the swing producer. Key going forward will be production stats and Rig Count, both of which are rising.
  • Nimble US producers can quickly raise output via drilled but uncompleted wells (DUCs), but jury is out on whether enough to offset planned OPEC output cuts.

 

US Production and DUCs

 

  • Sharply narrower Brent contangos & portions of WTI curve (Sep17-to-Q2 2019) flipping in and out of backwardation suggest significant oil market tightening through 2017.

Front month Brent Technical Analysis suggests bullish structure still in tact:

  

Feb17 Brent technicals

 

  • The recent rally off the 46.91 higher low spiked through the former peaks at 54.46 and 54.82 (June & October, respectively) to reach 55.33 on Monday.
  • Given that the market has rallied from 46.91 to 55.33 merely in four days, and that we have not yet seen a sustained break above 54.46/82, a near term dip towards 51.02 cannot be ruled out.
  • Once oversold conditions are unwound, bulls would look for a fresh attempt to decisively break above 55.33 to open scope towards the May 2015 peak at 69.63 in due course
  • The broader bullish trend in force since January and the bullish indicators also support a bull extension
  • Only a return through the 46.91 higher low damages the bullish structure and threatens the key 44.67 trough.

Issues for the weekend and beyond:

  • OPEC/non-OPEC this coming weekend may reveal whom of latter will offer to cut aside from Oman and Russia (commitment is not guaranteed from Moscow yet). Brazil, Kazakhstan? Kazahs recently started production from Kashagan field. Natural decline will leave Mexico -150k bpd next year, but are reluctant to cut more.
  • Non-OPEC compliance monitoring needs to be decided.
  • Global inventory drawdown in H1 2017 remains key.
  • What happens if Nigeria/Libya production significantly increases? Both are exempt from OPEC deal.
  • Also note, Saudi Arabia often cuts output by circa 500k in Winter (schedulerd OPEC deal) so may not become clear until late Spring when seasonal production usually increases as to how much it has actually cut.

Fundamentals: marcus.dewsnap@informagm.com

Technical analysis: kamran.sheikh@informagm.com

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