Saxo Warns Further Upside For Crude Hard To Achieve After Market "Change Of Focus"
By Tyler Durden
The dollar's gyrations remain a key source of inspiration for traders with the fundamental focus continuing to switch between falling US and rising OPEC production, according to Saxo Bank's Ole Hanson.
The nervousness and negative price action seen this week was triggered by a change in focus from falling US production towards the rising supply from others, especially within OPEC. Having seen calendar 2017 almost hit $50 last week the realisation that further upside may be hard to achieve may has helped trigger increased demand for protection.
The speculative net-long remains very elevated so just a small change in the fundamental or technical outlook can trigger increased demand for hedging.
This has been reflected in the options skew on WTI crude which during the past week has seen increased demand for put options.
The skew or “smile” shows that the cost of out-the-money puts has risen by close to 5% this week while OTM calls have risen by less than 2%
Furthermore, as OilPrice.com's Rakesh Upadhyay notes, the 70% rise in crude oil prices from the lows of $27.1 per barrel to a high of above $46/b in a matter of three months is being driven by speculative activity—make no mistake about it. The speculators have latched on to every bit of rumour and news to bid prices higher, and this has nothing to do with the real fundamentals.
However, speculation can boost prices only to a certain extent in the short-term. After this, the fundamentals take over. The extent of speculation is enormous, though the daily production of oil in the U.S. is around 9 million b/d, the WTI crude oil contract trades more than 100 times the produced quantity, as highlighted in this January 2016 post.
The trading volume is generated by the algo traders, day traders, and scalpers who are in and out of their positions many times a day. Due to their enormous volume, they set the direction of prices in the short-term.
However, these traders are neither involved in the production nor do they take physical delivery of oil; they are usually active only in the near-term contracts until expiry; after which the users of oil take deliveries.
The oil producers have used the sharp rise to hedge part of their production for 2016 and 2017 as reported by The Wall Street Journal.
(Click to enlarge)
However, Citi Research points out that the oil producers have hedged only 36 percent of their estimated production for 2016, compared to 50 percent in the previous years.
If prices creep up further, the producers will not only hedge more, they are likely to increase production to mend their balance sheet.
Pioneer Natural Resources has hedged 50 percent of its expected 2017 output and has conveyed its intention to add five to ten horizontal drilling rigs if prices recover to $50/b, with a positive outlook for oil fundamentals. Earlier on, too many U.S. shale …read more
Source: Saxo Warns Further Upside For Crude Hard To Achieve After Market "Change Of Focus"
