FxWirePro: Spotlight On Intricacies Of Crude Oil Market And WTI Hedging Strategy

OPEC+ met on June 6 to formalize a one-month rollover of the output cut and to push pump-happy members like Iraq, Nigeria and Kazakhstan to better comply with existing curbs.

With tank top risks now gone and markets visibly rebalancing, a one- month extension of the current record production cuts signals a shift in focus from solving immediate crude storage constraints in April to targeting a particular price/curve shape outcome in June.

The shift to a new, more calibrated approach of month-by-month market evaluation signals a notably different approach to inventory management where OPEC hopes to tighten near-term balances and push spot prices higher than forward prices, encouraging inventory draws.

Also over the weekend, Libya’s National Oil Corp. announced the restart of 300 kbd Sharara and 120 kbd El Feel oilfields. Operations at Sharara will commence at an initial 30 kbd and take three months to return to full capacity.

We now estimate OPEC 13 production will be scaled lower from 24.6 mbd in May to 23.3 mbd in June and 23.2 mbd in July but still exit the year at 26.6 mbd in December.

This one-month deal extension will expedite market rebalancing by two months with global markets moving into a firm deficit in July, per our estimates. We raise our 2H’20 price forecast accordingly.

However, our price forecasts are below the forward curve given our 2H’20 deficit is averaging 2.0 mbd per month compared to our view that market consensus is currently pricing in a deficit in the range of 4 mbd to 5 mbd.

The most pressing risk to our current price forecast is the further tightening of the US market in the near term which would further support prices. If this were to be the case, then the US oil market would have to contend with producers beginning to complete wells they deferred as a result of the price swoon observed in March. The assumption at the current time is that the deferral in the completion of wells will last until 4Q’20; however, further near-term price strength could encourage these wells to be completed even sooner as producers bring production shut-ins back on line. While not only adding near-term upside risk to our forecast, we believe this would also provide some downside risk to our 4Q’20 price forecast of $34/bbl, as US oil production would likely realize higher than our current December 2020 exit level of 11.2 mbd. 

Foreseeing the puzzling swings in this energy commodity, we recommend long hedges of CME WTI of June tenors, simultaneously, shorts in CME WTI futures of July’20 delivery for the major downtrend. Thereby, one can ensure directional positions amid macroeconomic turmoil as emphasized in our recent posts. Courtesy: JPM