Oil Markets

Oil traders eventually came up for a bit of air today despite the overriding bullish sentiment on the back of the US administration Iran resolve. But numerous critical barometers used to gauge market sentiment including both optionality and spreads continue to fire off bullish signals. Call premiums have ratcheted higher while the near contracts spreads have moved well into backwardation. This combination from a quantitative perspective generates a strong buy signal. Opinions are noise market position is fact!

Yesterday’s price action was tentatively held hostage to the possible developing game of cat and mouse between OPEC producers the US administration. Saudi Energy Minister Khalid Al-Falih signaled OPEC was content to bide one’s time opting to gauge the decline in Iran oil cargos before raising output. But what he meant was “fool me once shame on you but fool me twice shame on me”. OPEC doesn’t want to get hoodwinked again by President Trump after they were blindsided by the President issuing Iran waivers the first time the US administration wanted to drive Iran exports to zero.

So despite Brent hitting a 6-month high, the market is trading a bit tentatively after all we have touched a 6-month high which after all is normal price behaviour.

But if the US is fully committed to their hawkish Iranian pledge prompt prices will reprice higher as Saudi Arabia appear tentative about increasing supplies while it is unlikely Shale can fill the void quick enough. So to what degree oil markets tighten, and how high oil price goes, will now mostly be dependent on the supply response from OPEC+ group.

However, necessity makes strange bedfellows, and you won’t find any weirder than the ones Saudi Arabia are keeping. On the one hand, they have coherence with Russia to reduce oil supplies while at the same time they now have a pact with the US to increase supply. Ultimately something is going to snap.