February 2016 – 19.12.2016 – 1 hour chart – Brent ($)

Very similar case as my last short call 13.12.2016 – OPEC Deal fallouts: Nice short opportunity

My point is the same: market has been driven by OPEC announcements and future expectations and prices do no fully reflect fundamentals for the moment. Target: $50-$52

  • (1) Current fundamentals: bad
  • (2) Expectations: too much?
  • (3) Sentiment: contrarian 
  • (4) USD: neutral 
  • (5) “Smoke” of OPEC should dissipate and so should market buying momentum
  • (6) Big players

On the first chart above, we can notice that Brent prices are currently at the top of the range of the 9 past previous months. This does not reflect the fundamentals.


(1) Current Fundamentals

Fundamentals are shaky. Production at historical highs from “old” producers (Saoudi Arabia, Russia) + new production coming quickly to the market (US, Nigeria,Iraq, Iran..).

  •  Inventories

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  • US: increase in number of rigs
  • OPEC: production at historical highs

Middle East producers opened the taps, the IEA said. Saudi Arabia, Kuwait and the United Arab Emirates pumped at or near record levels and Iraq pushed output higher, according to the agency.

  • Russia: production at historical highs

(2) Too much expectations?

Yes there is a deal – so what? I know that OPEC and non-OPEC have agreed to around 2m b/d in production cut next year. BUT

  • This si for next year
  • This may not be fully respected
  • Even with this cut the market won’t trim the glut before 2018-2019

Let’s not forget: the OPEC deal which “guarantees” a certain stability, or floor in oil prices, depend upon cooperation between the Saudis, Qatar, Iran, Russia, and Iraq (among others). Those countries are on opposite sides of Middle-East proxy wars. 


(3) Sentiment: contrarian approach

Investors are currently holding record long positions (for the past 2 and a half year). Net long contract are above the 300 thousand threshold.

From Bloomberg:

Hedge funds increased wagers on rising WTI by 2.5 percent in the week ended Dec. 13, U.S. Commodity Futures Trading Commission data show, while shorts, or bets on lower prices, tumbled 30 percent to the lowest level since May.

2 things:

  • contrarian stand: when everyone is buying and price is high: sell
  • possible long liquidation if catalysts (ex: data on supply and demand fail to live up to expectations). Investors will be cashing out and could amplify a potential downward move. Risk in the market have shifted to the downside. 

(4) US Dollar

Nothing much for this week. I think there will be fewer volatility until January and it shouldn’t have too much impact on oil prices for the coming period.


(5) Smoke of OPEC should dissipate and so should market buying momentum

  • OPEC has driven the price of oil this year 

Since April to now Brent has been roughly trading between $42 and $52. Information related to OPEC have been driving the market – lot of volatility.

This phase is approaching its end as a deal has been reached – big upside move occurred in two legs: after the deal was agreed by OPEC members and the second after non-OPEC countries agreed. There was a downward consolidation after the first leg.

This deal will be implement at best beginning of 2017 . I think expectations have too much influence now and market is not looking at concrete data and current situation.

  • Lot of smoke –-> what now? 

There is a vacuum now and I think fundamentals data should come back as the main driver of the price.

There are some major concerns (especially from the supply side) that could trigger a sell-off. The oil market is yet to be balance.

This is the story of who is driving the market? Expectations vs. present. OPEC has raised expectations, price followed. But present situation is still shaky and should drive market lower

  • Market Momentum calms down

Overreaction to positive news: price rallied beyond fundamentals

No more “story” from OPEC to keep feeding buyers

Buying hype should fad


(6) Big Players

Not so much short left, so no crazy spike to come due to short covering

Lot of hedging at those levels (see future curve)