Oil positioning for break to the upside - TDS

A powerful combination of quite robust global demand growth, sharply lower US inventories, OPEC/Russia supply discipline and disruptions and increased geopolitical risks have prompted investors to take aggressive long positions of late, according to analysts at TDS.

Key Quotes

“Strong demand is expected to rebalance the global oil market in times of supply constraints. OPEC raised estimates for the amount it will need to take out of the ground to satisfy global requirements next year by 400k bbls/d to 33.4 million bbls/d. With firm consumption, current OPEC supply constraints imply waning inventories and bode well for the oil price outlook.”

“Alongside specs, technical traders took crude to the very top of the trading range, ready for a takeoff higher. Indeed, the fact that both WTI and Brent are in a significant back for cal 2018 suggests the prompt's market conditions are quite tight. But it is also likely that considering the lack of liquidity in the deferred part of the curve, markets are unsure if this constitutes real tightness or just capital flows. This uncertainty suggests specs are unlikely to push WTI significantly past $60 or Brent into the $70 for a while yet. The market needs to know that the tightness is for real.”

“A steep backwardation also suggests that shale and other nonconventional producers may find it difficult to hedge and may result in only modest new capex to facilitate capacity expansions.”

“Based on recent signaling, it very much looks as if OPEC/Russia will extend the current production restrictions for all of 2018 and that US production is likely to remain well anchored amid recent drilling activity weakness. As such, US and global inventories look set to adjust lower at a decent clip, which should lift prices even higher. However, we don't expect a move much above current levels in the near term, as there is plenty of psychological resistance and concerns that supply will come rushing at $60+ WTI.”