Data provided to the Financial Times show that crude oil being shipped over the oceans or stored on supertankers has dropped by as much as 16 per cent since the beginning of the year, in a signal that supplies could be dropping faster than many in the market believe.

Vortexa, an oil tracking start-up founded by BP’s former head of trading technology and a one-time JPMorgan commodity executive, says its numbers indicate Opec’s cuts with big producers like Russia have been clouded by a surge in US production that is not reflective of supplies in the rest of the world.

“Water is where the market changes first”

“We think this is some of the first evidence that supply cuts are having a major effect.”

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Vortexa, which has received funding from Skype co-founder Jaan Tallinn, says its data show seaborne oil shipments on April 3 totalled 759.6m barrels of crude in transit from producers to refineries or storage farms, with an additional 52m barrels still held at sea on supertankers globally.

That is down from 899.4m barrels in seaborne transit on January 1 when 78.4m barrels was also held in floating storage. The combined total from April 3 is also down by 17 per cent from the same day a year ago, suggesting the supply drop is more than just a seasonal fall, despite many refineries carrying out maintenance in the spring months.

While seaborne shipments and storage do not capture the entirety of the 98m-barrel-a-day oil market, as it excludes pipeline flows and production that goes straight from the wellhead to refineries or on land storage, it does cover a significant percentage.

US crude inventories, which have risen since the start of the year as domestic production rebounds towards 9m barrels a day, were masking tightening supplies elsewhere. US oil data are widely seen as the most timely and accurate in the industry, with the Energy Information Administration publishing weekly reports on inventories. No comparable data are available in Europe or Asia.

“The US is producing so much that their stocks level is still going up,” said Mr Kuhn. “But the rest of the world is not reflective of that. The US has been disconnected because of the amount of oil that’s being produced there.”

Oil prices logged their strongest weekly gains after local militia in Libya cut oil output by around one-third around a week ago, but officials said production had restarted on Monday.

“Libya had managed to resurrect its production to 700,000 barrels a day. The national oil company was looking to push that to 1.1 million barrels a day by August, but unfortunately you will have these stoppages in Libya,” said Harry Tchilinguirian, head of commodity strategy at BNP Paribas SA . “The good news is they tend to be a lot shorter.”

The gains last week were also supported by increasing optimism that major producers will keep output capped in the second half of the year.

The bullish sentiment is also driven by views that despite rebounding U.S. production, output growth there isn’t fast enough to offset the cuts being made by the Organization of the Petroleum Exporting Countries and others.

“The front and center question for the oil markets right now is whether or not OPEC and non-OPEC producers extend their production cuts,” said Mr. Tchilinguirian, adding that a failure to extend would be “dire” for oil prices.

The cartel will meet on May. 25 and review the deal.

“It is our base case that cuts will get extended,” said Scott Darling, head of regional oil & gas for Asia-Pacific at J.P Morgan . “However, there are clear risks for intra-OPEC tension [with] respect to the fact that the Saudis haven’t cut back their exports.” While the kingdom’s production has decreased, domestic crude demand from power generation has fallen due to ample supply of natural gas.

“As Saudis crude exports have remained relatively the same year-over-year, that could be an issue for some of the OPEC members,” Mr. Darling said, adding that could prompt the producers to re-engage in a battle for market share.

  • Bloomberg: Oil Traders Drain Hidden Caribbean Hoards as OPEC Cuts Bite

During the oil price rout, islands in the Caribbean were exhibit A for the longest-lasting glut in three decades, with millions of barrels stored there. Now, that oil is flowing again, a sign the market is rebalancing.

Low taxes and the Caribbean’s proximity to U.S. and Latin America oil centers have made it into one of the world’s largest oil storage centers, holding as much as 140 million barrels. While a lack of official data can make the area invisible to some, the information is key in framing a full picture of global supply and demand at a time of market uncertainty.

Since mid-February, between 10 million and 20 million barrels have left the Caribbean, according to estimates from traders who asked not to be named because their data is proprietary. The draw, hardly noticed by most in the market, reflects the impact of the output cuts orchestrated by OPEC and Russia.

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Grand Bahama, Aruba, Bonaire, Curaçao, St. Eustatius and St. Lucia, mostly known for the beaches that draw sun-chasing visitors from around the world, all have significant depots to store crude and refined products.

Chinese oil companies, which lease millions of barrels of storage in the southern Caribbean sea, are leading the stock-draw from those islands, the traders said. PetroChina Co. used the super-tanker Nectar last month to remove stored crude from Aruba and Curaçao, according to ship-tracking data compiled by Bloomberg. It also loaded the Maxim, another very-large crude carrier (VLCC), with crude from storage in the Caribbean Sea.

Indian oil refiners are also taking crude out. In a rare shipment, Reliance Industries Ltd. received Ecuadorian crude stored in the island of Grand Bahama in the DHT Condor super-tanker. More recently, another giant tanker, the Amphitrite, took Venezuelan crude from a terminal in St. Eustatius, also for Reliance.

“Globally, crude stocks are coming down,” said Mike Loya, the Houston-based top executive at Vitol Group BV, the world’s largest independent oil trader.

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The Caribbean outflows also reflect a change in the relationship between spot and forward oil prices. For much of 2015 and 2016, the shape of the oil curve showed spot prices below forward prices. In a contango market, traders can buy barrels, place them on storage and lock in a profit by selling them forward in the futures market.

The price difference between Brent crude oil for immediate delivery and the one-year forward, a key contango yardstick, reached more than $11 a barrel in January 2015. But after OPEC and Russia announced their output cuts in late last year, the contango has all but dissipated, with the one-year Brent price spread at just about 80 cents a barrel on Monday.

Since World War 2, the annual average ratio has reflected the fact that one ounce of gold could buy precisely 14.83 barrels of oil. Therefore, whenever one ounce of gold can buy more than 14.83 barrels of oil, either oil is comparatively cheap or gold is comparatively expensive. Conversely, whenever an ounce of gold can buy fewer than 14.83 barrels, then oil is expensive or gold is cheap.

Currently, the ratio, which bottomed at about 21 at the end of 2016 (see chart), has risen to just over 26. Most importantly, as Dennis Gartman remarked recently (The Gartman Letter, 24 March 2017), the ratio has now clearly broken the trend line that had been established since it peaked in early 2016 at just above 45. So 45 barrels per ounce reflects very cheap oil or very expensive gold; 21 reflects very expensive oil or very cheap gold.

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Year after year, Mexico places a multi-billion-dollar bet in a deal that big banks lust after. This is the untold story of how the “Hacienda hedge” happens.

Almost seven months earlier, at the beginning of January 2008, the price of oil had flirted with $100 a barrel for the first time in history. It retreated to below $90 by the end of the month, but then, in early February, the price took off. West Texas Intermediate, the U.S. benchmark, reached a new high every month—$103.05, $111.80, $119.93, $135.09, $143.67—until finally, in early July, it hit $147.27 a barrel. Seemingly insatiable demand from emerging economies, including China and Brazil, encouraged outrageous chatter of $200 a barrel among the giddiest traders. Even those with bearish outlooks were fairly optimistic, figuring there would be a correction, not a crash.

Yet on July 22, 2008, just 11 days after oil reached its all-time high, this small group of Mexicans gathered to discuss their very different outlook in the ornate surroundings of Mexico’s finance ministry, the Secretaría de Hacienda y Crédito Público.

When “the men from Hacienda,” as they’re known, ­headed back to their desks, their mission was to lock in, or hedge, Mexico’s oil revenue through a deal with Wall Street banks

From Houston to New York to London, bankers worked against the clock to close the gigantic transaction. It amounted to 330 million barrels, enough to meet the annual oil imports of the Netherlands. Barclays, which was then muscling into the commodity big leagues, did the bulk of the buying with 220 million barrels. Goldman followed, at 85 million barrels.

Betting that oil prices were about to crash was an audacious wager, one made all the more remarkable by the individuals behind the deal—civil servants with unassuming titles such as “director general of fiscal planning.” In the lucrative oil business, a profession known for its generous compensation, these government employees were probably the worst-paid stiffs around. Yet the men from Hacienda—so called still, even though women are sometimes in the room—proved prescient in predicting a crash.

Everybody knew the world was tipping into a financial ­crisis at the time, but because of its excellent banking and political connections in the U.S., Mexico may well have had special insight into just how bad things would get. What’s more, as one of the world’s top oil exporters, the country generally has better information than, say, hedge funds, about where the market is heading. In 2008, that information led those in the room to believe global supply was well in excess of global demand.

“At the start of the summer we saw that the financial crisis was spreading fast,” he says. “Despite that, oil prices were still high. They were even climbing. We told ourselves, ‘We need insurance, and we need to take advantage of $150 oil prices.’

Oil hedges aren’t uncommon. Airlines do them to insure against rising prices; U.S. shale producers rely on them to lock in revenue. But no deal comes close to matching Mexico’s annual “Hacienda hedge.” “Mexico is the biggest annual oil deal

Over the last 10 years, the notional value of the hedge has added up to $163 billion. “It’s the deal that all banks wait for each year,”

Despite its size, impact, and huge fees, the deal is one that few people, even in the energy industry or on Wall Street, know much about. Painstakingly, the world’s 12th-largest oil producer and its bankers have cloaked the program in secrecy to prevent others—namely trading houses and hedge funds—from front-running Mexico’s orders. “Minimizing its visibility is extremely important,

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Mexico’s oil hedge has real economic significance. Until fairly recently, the country relied on oil for about a third of its income, leaving it dangerously exposed to boom-and-bust price cycles. According to current and past government officials, the main purpose of the hedging is not to pad the country’s coffers but rather to protect the federal budget from fluctuations in oil prices.

The hedge means Mexico pays about 30 basis points less on its sovereign debt,” he says. Hedging is like buying insurance

For its part, Mexico has shown a Wall Street-style wizardry in trading oil. It usually makes money on its hedges—sometimes a lot of money, as in 2008-09. From 2001 to 2017, the country made a profit of $2.4 billion; its hedges raked in $14.1 billion in gains and paid out $11.7 billion in fees to banks and brokers.

Last summer, Mexico spent just above $1 billion buying put options with a floor price of $38 a barrel. If prices stay where they are now, hovering around $50 a barrel, the men from Hacienda won’t make any money, but if prices drop on average below $38 a barrel, they’ll start to. We won’t know the outcome until December.

The audits confirm Mexico’s reputation in the oil market for shrewd trading and its keen desire to keep the deal quiet. No year epitomizes those characteristics as much as 2007, the year before the big deal that made $5.1 billion for Mexico. The men from Hacienda started early in 2007, hedging 5 million barrels during the week of June 18. With prices failing to decline, Mexico slowly built up its position, selling 185 million barrels in the next three weeks. In late July, with prices rising fast, it went all in, doing 100 million barrels in a single week. The wave of selling sent prices tumbling 10 percent. Mexico ­immediately vanished from the market, staying quiet for three weeks. The men from Hacienda didn’t return until the end of August, as prices rose again, quickly selling an additional 85 million barrels in 10 days. In total that year, Mexico sold 435 million barrels in 68 deals. Goldman Sachs handled the bulk of those orders—250 million barrels in total.

Mexican officials have argued that the hedge, which runs annually from Dec. 1 to Nov. 30, doesn’t affect prices. However, bankers who are or have been involved in the deal, as well as oil traders who monitor it closely, say Mexico’s hedging, in fact, roils the market. That certainly happens when Mexico’s bankers sell futures to protect themselves, putting downward pressure on oil prices. If only because of its magnitude, the hedge is a fount of rumor, chatter, and volatility—particularly when Mexico is hedging and the market is falling, as in 2008 and again in 2014.

For the massive Middle East producers, hedging appears to be a headache they’d just as soon avoid. With small populations and huge revenue, they instead self-insure, amassing their ­petrodollar reserves and saving during boom times by pouring money into their fat sovereign wealth funds. Saudi Arabia, for example, has since late 2014 used about $200 billion from its foreign exchange reserves to weather a period of low prices.

Mexico’s hedge has never triggered a ­political backlash of any real consequence. But that doesn’t mean the joyride can last forever. Oil is no longer the make-or-break revenue generator it once was. Last year it accounted for only 17 percent of total government revenue. And oil production is declining even as domestic demand is climbing—reducing net exports and hence the size of the deal.