Despite spoiradic algo-crazed ramps, crude oil prices continue to slide back towards a $34 handle (in Jan '16 contract) this morning following a reiterated downbeat note from Goldman warning that storage levels are "too full for comfort," that positioning is not as stretched short as some believe, and confirming that this will not end until prices near cash costs to force production cuts, likely around $20/bbl.

Positioning still not stretched short



The move lower was amplified by positioning, with short covering and new ETF long positions ahead of the OPEC meeting providing sufficient ammunition to push prices to new lows. This move was also likely exacerbated by a negative gamma effect around the large WTI Jan-16 $40/bbl strike option open interest. With Brent positioning still off its lows, continued weak oil fundamentals can still push prices lower. Beyond oil, it is also important to note that oil net speculative short positions have tracked dollar long positions closely this year...





OPEC and storage concerns weighing on oil prices



The decline in oil prices has resumed, driven by the aftermath of the OPEC meeting, renewed weakness in distillates and exacerbated by positioning. Although prices are now below our 3-mo $38/bbl WTI forecast, we still see high risks that prices may decline further, as storage continues to fill.

In further confirmation of these concerns, Genscape data saw a 1.4 mm barrell build at Cushing.

The canary in the coal mine

For now, the European distillate market is showing the most acute symptoms of nearing storage capacity with gasoil timespreads, cracks and cash basis falling sharply.

Tank tops not our base case, but too close for comfort



Our oil price forecast remains anchored by the view that high producer financial stress and shut funding markets near $40/bbl can halt the oil surplus by 4Q16, mainly through declining US production. Our base case remains that the global oil stock build will on aggregate remain shy of storage capacity, although the storage buffer has once again narrowed, to 340 kb/d on average for 2016. But this rebalancing is far from achieved:

(1) the US rig count and E&P guidance remain too high to achieve the required supply decline, (2) we see risks to our OPEC production forecast of 32 mb/d next year as skewed to the upside (Iran), (3) storage continues to fill with the odds of hitting storage constraints by the spring rising.

As a result, we reiterate our concern that “financial stress“ may prove too little too late to prevent the market from having to clear through “operational stress” with prices near cash costs to force production cuts, likely around $20/bbl.