Oil Prices Hint Bear Market As Short Positions Surge To 10 Year High

A new week, a new month, a new sell-off. Crude oil prices are charging lower to start the week as a plethora of bearish indicators emerge to encourage crude lower. Here are five things to consider in the oil market today.

1) First up, Saudi Arabia has cut its official selling price (OSP) for Arab Light into Asia for September by the biggest amount in nearly a year. The Kingdom has lowered its OSP to a $1.10/bbl discount versus Oman-Dubai; while some will interpret this as a signal of Saudi rolling up its sleeves to battle for market share, it is more likely that the price discount is a response to lower impending Asian demand as refiners dial back on runs.

As our ClipperData illustrates in the chart below, Saudi has accounted for some 16 percent of waterborne crude oil deliveries into China this year through June. This number has been inflated by February imports at their highest since at least 2013; nonetheless, Saudi’s share of waterborne flows to China is below that seen last year, as the battle for market share rages on.

2) The latest CFTC data show that speculators increased their shorts (aka bearish bets) by the biggest volume on record in last week’s data for WTI crude. This is the biggest increase since data began back in 2006, dragging the net long position in WTI to its lowest since February.

Another bearish development from the CFTC data has been gasoline positioning. Speculative positions in gasoline have moved to a record net short position as hedge funds bet on an ongoing gasoline supply glut.

3) As Indian domestic oil production (see below) continues to edge lower as demand continues to increase, it has boosted foreign investment in an effort to increase its energy security. Indian investment in Russian oil projects is now close to $6 billion, while it has invested a further $6 billion into a gas project in Mozambique.

The chart below shows India’s expected increase in oil demand over the long-term. This year it is surpassing Japan to become the third largest oil consumer in the world behind China and the U.S.:

4) Sinopec is looking to double its domestic production of shale gas through heavy investment in the coming years. It is expected to reach close to to 4 Bcf/d by 2020 as it taps China’s huge shale reserves, even as it dials back on its oil investments.

Chinese domestic consumption increased by 3.3 percent last year, down from double digits in recent years. Sinopec is targeting production growth of 18 percent per annum to achieve its goal; in the first half of the year it only reached 10 percent.

5) While we have previously raised concerns about Venezuela’s finances in relation to their ability to purchase diluent to mix with their heavy crude to export it, other financial cracks are appearing elsewhere. Schlumberger has halted work at four of six drilling platforms that it operates in Lake Maracaibo, citing a lack of payment by PdVSA.

It was only in mid-June when Schlumberger had previously reached an agreement to keep six platforms operating. Halliburton also said in April that it would reduce operations in Venezuela due to underpayment from PdVSA, while other services companies have also suspended operations.

Courtesy: Matt Smith

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