Last Wednesday, we advised readers that the shorting of oil among the systematic community (i.e. CTAs) had hit near record levels, and with some $30BN in short positions, the “chase” was about to begin.
CTAs are $30BN short and are about to start chasing https://t.co/Th55TKBgoN
— zerohedge (@zerohedge) March 29, 2023
It wasn’t just CTAs: as we also observed one day prior, on March 28, hedge funds were liquidating exposure in virtually all kinds of petroleum products at the fastest pace in years…
… but then something clicked, and as we discussed last week on our private twitter feed, first Goldman’s FICC desk – which unlike the bank’s sellside research group is spot-on most of the time with its trade recos – said that it was time to pursue “opportunistic upside” in Brent…
… which coupled with the sharp jump in oil prices after falling to a 15 month low in mid-March, led to a painful reversal in positioning as managed money shorts unwound bearish bets on WTI crude by the most since 2016…
…. almost as if they knew something was coming.
Maybe they did, maybe not, but something was indeed coming and on Sunday, OPEC+ stunned the world when it announced its second coordinated output cut in under half a year.
While TS Lombard noted earlier that there was a clear political angle to the timing of this announcement, coming shortly after US officials effectively ruled out new crude purchases to replenish the Strategic Petroleum Reserve in 2023, underscoring the souring of US-Saudi relations, and just days after Riyadh pledged its allegiance to Beijing, the surprise OPEC+ production cut was aimed squarely at one audience: the near record shorts that had pushed oil prices to levels that forced the oil cartel to respond.
According to Bloomberg, it’s a return to the tactic first used by Saudi Energy Minister Prince Abdulaziz bin Salman in 2020, when he famously said he wants “the guys in the trading floors to be as jumpy as possible” and vowed that “whoever gambles on this market will be ouching like hell.”
Of course, as today’s market action clearly showed, the assault on short sellers was successful. Markets were wrong-footed and oil futures surged as much as 8%, repricing assets from equities to bonds. Yet OPEC+ also caught consumers and the global economy in the crossfire, spurring concerns about inflation and prompting bets on further interest rate hikes.
As Bloomberg reports, OPEC+ began to see the need for a change in oil policy on March 20, just days after we first hinted at another OPEC+ output cut…
Who cuts first: OPEC+ or Fed
— zerohedge (@zerohedge) March 15, 2023
… when Brent crude slid to a 15-month low near $70 a barrel as a banking crisis threatened to hobble the economy. The Saudis reflected that short sellers were due a reminder of the pain OPEC+ can still inflict on them, the BBG sources said.
Once the wheels were in motion, the decision to hold back more than 1 million barrels of oil from the market was finalized in just a few days, and in a very tight circle. Some delegates said they found out just a day or two before the announcement. Two officials said they were completely blindsided by the decision which makes sense since most of OPEC+ is leaky like a 50 year old oil barrell and most delegates are quick to spew all secrets to their preferred leggy female media reporters (you’ll never guess what takes place in those glitzy Vienna hotels late at night).
The impact was all the greater because, in the buildup to an OPEC+ committee meeting scheduled for Monday, Prince Abdulaziz had repeatedly said the group would hold output steady for the entire year to keep markets stable.
In the end, the announcement on Sunday in the European afternoon, with markets closed, was chosen for maximum impact, the sources said. Sure enough, Brent jumped more than $6 a barrel when Asia woke up, the biggest move in more than a year.
Explaining the decision, delegates pointed Bloomberg to market data on the build-up in short-selling…. the same market data we shared with readers just one day earlier.
As prices slumped with the banking crisis in late March, speculators piled up bearish bets on US crude to the highest in four years and reduced bullish positions to the lowest in more than a decade, according to figures from the CFTC. The financial fears abated toward the end of the month and those short positions were dialed back, but by that point the Saudis were feeling nervous, the people said. The hastily brokered takeover of Credit Suisse Group AG had sparked fears that financial contagion could damage the global economy.
That said, the announcement wasn’t meant to be only a short squeeze trigger: fundamental concerns also emerged, and as the Saudi kingdom grew more concerned about the strength of oil demand, evidence emerged that supply was more than ample. In late March, a key export pipeline from Iraq was halted because of a legal spat between the Kurdish regional government and Baghdad, knocking about 400,000 barrels a day off global supply. Yet crude rose just 4%, strengthening the view that bearish speculators held sway over the market, said one person.
“The market had become a playing field for these shorts” and OPEC+ wanted to drive them out, Amrita Sen, director of research at Energy Aspects Ltd., said in a Bloomberg television interview. The producers group is saying “take us on, but at your own peril.”
The OPEC+ fight with short-sellers also has political implications. It brings most of the group into alignment with Russia, which kicked off the unilateral production cuts in February with a 500,000 barrel-a-day reduction in retaliation for international sanctions. By extension, the output cut also aligns the world’s most powerful oil exporting body squarely against the White House, which was livid after the surprise announcement sent oil – an gasoline – prices sharply higher.
Those curbs haven’t yet fully materialized and their positive impact on prices had been erased by the banking crisis. Now, with OPEC+ members joining in, the oil revenue that feeds the Kremlin’s war machine will be bolstered. Ironically, it comes at a time when the Western anti-Russia alliance is cracking, with the WSJ reporting yesterday that Japan was given an exemption to buy Russian oil above the price cap, a move which most nations will quietly follow.
Last but not least, the Saudis also had to weigh how the decision would affect its relationship with Washington, which has been strained by the kingdom’s repeated refusal to heed American requests for more oil. As Bloomberg puts it, “If the production cuts bring $100 crude back into play, with everything that would mean for high inflation and rising interest rates, US consumers and the White House could join the short sellers in “ouching like hell.“
That’s ok though, at least the Biden admin will have a full SPR to release when times get tough… oh wait.
And speaking of the lowest SPR inventory in nearly 40 years, it’s time to concede that $100 a barrel is finally back into the frame, especially considering that required capex spending to maintain output is woefully inadequate.
“There’s a bullish narrative,” Bob McNally, president of Rapidan Energy Group and a former White House energy official, said in a Bloomberg TV interview on Monday. “If they cut into a bullish narrative, then $100 — we’ll go through it at high speed.”
Beyond the initial market reaction in the hours after the OPEC+ announcement, the key marker for the physical impact of the cuts and the price trends in the coming months will be oil inventories. There had been signs that stockpiles were in decline in recent weeks. In the US where official figures are most visible because they are published weekly, oil stocks dropped by more than 20 million barrels over the last two weeks. Global onshore inventories had fallen in seven of the last nine weeks, according to Vortexa.
But there is still a long way to go. At the start of April, global onshore crude stockpiles were still about 140 million barrels above the level seen a year earlier, Kayrros data show. Taking an extra million barrels a day of supply out of the market in a period when demand should steadily ramp up will erode that surplus.
“The move is extremely bullish as draws on inventories will be immediate,” said Nadia Martin Wiggen, an analyst at Pareto Securities. “This cut proves again that OPEC+ is proactive in managing the supply-demand balance and requires $90 to $100 a barrel.”
Not everyone agreed of course, and as usual, Wall Street’s most vocal oil permabear – who has the lowest oil price targets of all Wall Street analysts – Citi’s Ed Morse said in a Bloomberg TV interview that “there is a scenario for $100 a barrel oil. But I don’t think we’re anywhere near that yet.”
He also wrote in a report overnight that “OPEC+’s actions are clearly focused on shoring up a market that was looking increasingly weaker.” He added that “given market positioning and short covering, a spike now seems inevitable, but could be followed by realization that the market is a lot weaker than people think.”
Or maybe the market is a lot stronger, and China was merely masking its economic recovery precisely to inflict the most damage not only on shorts, but the Biden white house. In a time when the multi-polar world order is breaking down and virtually every nascent superpower (or just plain old “power”) is taking on the senile 80-year-old in the White House, this is certainly a credible scenario.
Mon, 04/03/2023 – 22:00