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WTI Plunges Back To $44 Handle As CS Warns Of Contango “Big Red Flag”

Thursday, November 3, 2016 9:56
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WTI Crude has tumbled back to yesterday’s lows (after the biggest inventory build on record) with a $44 handle.

As Bloomberg reports, Credit Suisse analysts including Jan Stuart warns that OPEC ministers “now face a very tall mountain” as they try to reach agreement on member quotas in an agreement to steady oil markets.

  • As oil prices slide, “we would be less worried about OPEC and sentiment if it were not for the nasty widening of Brent’s prompt-to-six contango”
  • Widening spread a “large red flag about near term global crude oil fundamentals” with commercial participants still seeing things weakening
  • Brent M1-M6 spread closed at -$3.15/bbl yesterday vs – $2.96/bbl Nov. 1

Some more from Credit Suisse’s Jan Stuart:

For a spell, mostly in September, things oil were improving just fine. As falling Brent and WTI prices are passing the 10%-below-the-peak mark, we would be less worried about Opec and sentiment if it were not for the nasty widening of Brent’s prompt-to-six contango.

  • Wider than $3 – in a few short days of trading January as the prompt month, the 1-6 month Brent contango has widened back out to $3.10/b. No longer can we blame the December month’s approaching expiry for that large red-flag about near term global crude oil fundamentals. Clearly commercial market participants still “see” things weakening, Figure 1.

It’s too early to know how much speculators have already sold into the market’s weakness, but evidently Opec has done its bit to deflate expectations. And fundamentally, we don’t know yet if last week’s US import-surge and extreme stock-build were a catch up or the beginning of a bearish year-end.

  • Opec no deal – Absent real progress at lower level talks last weekend, Ministers meeting in Vienna in four weeks were going to face a tough climb up a steep hill. Since things have clearly bogged down into negotiations about old-fashioned quotas – precisely what Opec had wisely shied away from for more than a decade — ministers now face a very tall mountain.
  • Macro headwinds – we subscribe to the idea of the latest Global Cycle Note from our favorite economist, James Sweeney: Decent Data, Ugly Politics. This close to next week’s US elections, risk-off trading intensified. While we figured a month ago that our forecast of $45/b winter-average prices was a little pessimistic, that’s less of a worry now. And we stick to forecasting a real inflection only in Q2-2017 with less trepidation. Key for us remains the trajectory of inventories and critically US crude oil imports.

The ovenight bounce didn’t last long:

The entire Algiers’ ramp is now gone.


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