Hedge funds betting on rebalancing… Kemp/Reuters

by Jim Colburn • Monday, January 30, 2017

John Kemp points out in a Reuters article that hedge funds are betting that markets are rebalancing and moving toward backwardation… These traders are using calendar spread options or cso’s to reflect this view  (http://www.reuters.com/article/oil-options-kemp-idUSL5N1FH4OP  ):

“Hedge funds and other money managers have amassed net long positions equivalent to 160 million barrels in calendar spread options on the New York Mercantile Exchange (NYMEX).

Fund managers have amassed a net long position equivalent to 80 million barrels in physically settled calendar spread options (tmsnrt.rs/2jZ9D1H).

They have also accumulated a net long position equal to another 80 million barrels in financially settled calendar spread options, according to an analysis of regulatory data.

Fund managers will make money from their net long positions if the price of nearby oil futures contracts rises relative to longer-dated futures contracts as the oil market rebalances.”

Here are his charts:

The value of the calendar spread option is based on the front spread of WTI futures which is based on the price of WTI crude oil in Cushing, Oklahoma…  Additions to storage capacity, the reversal of and construction of pipelines to take oil away from Cushing and the ability to export US produced crude support the spread… OPEC success will also eventually help reduce oil in storage… Additional pipelines bringing oil into PADD II or specifically into Cushing will keep the spread depressed… And, finally, hedge fund length in futures contracts will also have a negative effect on spread values as rolling positions equate to selling the front month and buying the second month….

Owners of storage facilities who hedge are on the same side of these trades as they are effectively short the spread (storage owners profit in times of contango, lose in times of backwardation)… To hedge, they would be getting long the spread, too… Who is on the other side?


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OPEC is cutting… Bloomberg

by Jim Colburn • Saturday, January 28, 2017

From Bloomberg:

“Oil supplies from OPEC are plunging this month as the group implements production cuts aimed at erasing a global surplus, according to tanker-tracker Petro-Logistics SA.”

“The Organization of Petroleum Exporting Countries will reduce supply by 900,000 barrels a day in January, the first month of the accord’s implementation, said the Geneva-based consultant. That’s equivalent to about 75 percent of the cut that the producer group agreed. Eleven non-members led by Russia are to curb their output in support.”




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Risk vs. return.. Ritholz

by Jim Colburn • Saturday, January 28, 2017

From Ritholz, a long term perspective of risk vs. return for various asset classes:




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Some interesting charts on WTI/Brent from the CME….

by Jim Colburn • Friday, January 27, 2017

An article pulled of the CME website here (http://www.cmegroup.com/education/wti-and-the-changing-dynamics-of-global-crude-oil.html) written by Elizabeth Hui, Paul Wightman and Dan Brusstar, is supportive for WTI crude oil as the important futures contract in global trade:

“The new storage and pipeline infrastructure in the United States is so significant that it is likely to have a transformational impact on the crude oil market for years to come. These changes are likely to spur more trading in U.S. domestic grades and will magnify the role of WTI as a global benchmark.”

They include some excellent charts, some taken from analysis by Wood Mackenzie:


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Some Investors Bet on A Reversal…WSJ

by Jim Colburn • Wednesday, January 25, 2017

The Wall Street Journal suggests that despite a rallying stock market and volatility at extremely low levels, some traders are buying protection against a large move down:

“A measure that tracks investors expectations of “tail risks”—events with a small probability of happening—has climbed 15% this year through Jan. 20, when it reached its third-highest level on record. The gauge, called the CBOE SKEW Index, is based on out-of-the-money options prices on the S&P 500 and considered by some traders to reflect the probability of “black swan” events—drastic moves in the stock market.”

Here is an excellent chart showing various measures of market sentiment:

Market volatility is low (VIX chart), hedge funds are extremely net short volatility (think contrarian), the bearish/bullish ratio is also very low so some traders are going the other way by buying deep out of the money options…






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Trump Set to Take Action on Pipelines… WSJ

by Jim Colburn • Tuesday, January 24, 2017

The Wall Street Journal reports that… “President Donald Trump is set to take action Tuesday to advance the Keystone XL and Dakota Access oil pipelines…”  Here is the link:  http://www.wsj.com/articles/trump-set-to-take-action-on-keystone-dakota-pipelines-1485270333

On Keystone:

“Spokesmen for the project developer, TransCanada Corp., have said the company still backs the pipeline. If completed, Keystone would send as many as 830,000 barrels of oil a day, mostly from Canada’s oil sands to Steele City, Neb., where it would connect with existing pipelines to Gulf Coast refineries.”

And on the Dakota Access Pipeline:

“This project would carry up to 570,000 barrels of oil a day from North Dakota to Illinois.”


Now we need to know more about the import tax.  Maybe the Keystone Pipeline doesn’t make economic sense with a hefty import tax, but above, the company still supports the project…




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Oil Output Cuts Proceeding Faster Than Planned…WSJ

by Jim Colburn • Sunday, January 22, 2017

Here is Saudi oil minister al-Falih via The Wall Street Journal:

“Saudi energy minister Khalid al-Falih said OPEC’s 13 nations and 11 producers outside the cartel had made collective cuts totaling 1.5 million barrels a day since agreements were struck in late November and early December. Oil prices have risen nearly about 20% since those deals were made, despite widespread skepticism over whether OPEC and other producers would follow through.”

“Mr. Falih reiterated comments that his country—the world’s largest exporter of crude oil—had already cut its output by more than promised, to less than 10 million barrels a day. He predicted more cuts to customers in February and said output wouldn’t go back above 10 million barrels a day.

OPEC officials on Sunday estimated its compliance level at 80%, meaning about four-fifths of the oil it pledged to cut has been slashed. That is a faster rate than in 2009, when the cartel had a compliance rate of about 57% a month after its agreement.

Here is the link:  http://www.wsj.com/articles/saudis-russians-say-oil-output-cuts-proceeding-faster-than-planned-1485084865

Note that oil prices are just slightly above levels as early December, just after the OPEC meeting… Here is the chart from barchart.com:

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Refinery runs… Fuel Fix

by Jim Colburn • Saturday, January 21, 2017

Demand for crude oil should soften seasonally in the US as refiners head into maintenance…

Matt Smith at Fuel Fix shows current refinery runs in perspective:

Here is his commentary:

“4) After a completely counter-seasonal increase of 418,000 bpd to refinery runs for the second week of the year, logic has prevailed in yesterday’s weekly EIA inventory report as runs dropped by a whopping 639,000 bpd. Now it seems we are back on an even playing field, with runs down 221,000 bpd since the beginning of the year, heading lower in the coming weeks as refinery maintenance ramps up.

Even though this now makes sense over the two-week average, it does cause one to wonder as to the validity of last week’s print.”



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IEA Monthly Oil Report Summary

by Jim Colburn • Thursday, January 19, 2017

The one page summary is here:  https://www.iea.org/newsroom/news/2017/january/omr-a-six-month-probation.html

Here are some highlights:

“The output cuts announced by OPEC and eleven non-OPEC producers have entered their probation period and it is far too soon to see what level of compliance has been achieved. The coming weeks will provide more clarity and in the meantime developments elsewhere in the oil supply/demand balance are very intriguing. Once again we have revised upwards our estimate for global oil demand growth in 2016: we now see growth at 1.5 mb/d, with most of the revision contributed by stronger European demand, mainly in LPG and diesel. Europe has seen two years of year-on-year growth following nine straight years of flat or declining demand.”

“For the non-OPEC countries as a whole, net production growth will be 380 kb/d – after taking into account the output reduction commitments by eleven countries – and this increase could be supplemented by higher production from Libya and Nigeria, both of which are exempt from the production cuts.”

“We were reminded on Jan. 16th by Saudi Arabia’s oil minister that the output deal might not be extended beyond its six month expiry date. By saying that an extension was “unlikely” he has issued a powerful reminder that if stocks are drawn in the first half of 2017 by the approximately 0.7 mb/d implied by OPEC producing close to its target with support from other producers, the market will have tightened and prices stabilised but not at a sufficiently high level to allow another bonanza for high cost producers. In the meantime, the market awaits the outcome of the output deal.”

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Podcast on Energy Markets, Commodity Research Group (that’s us!)…

by Jim Colburn • Wednesday, January 18, 2017

Our first podcast on energy markets:

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