Oil looking up as short-covering continues

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mpEighty-three years after the board game Monopoly was invented, and oil prices are not represented by the iron (they are not flat), nor by the hat (there appears no lid). Instead they are represented by the car, as the market is trying to accelerate higher once more. Hark, here are eight things to consider on this first Monday in March:

1) After the first-week-of-the-month data deluge, we get the usual dearth of economic data this week. Fortunately for us commodity-focused folks, we get key monthly reports from the EIA and IEA to keep us entertained.

Today we get the monthly EIA drilling productivity report, which should show production in the Permian basin holding up, while Eagle Ford and Bakken continue their decline. Tomorrow sees the EIA Short Term Energy Outlook, with insights into future US production. We then have to wait until Friday before the IEA’s monthly oil market report, in which we will likely hear about the ongoing imbalance in the global market (regardless of what price action is doing). OPEC’s monthly report is not on deck until next Monday.

2) Oil prices are starting the week on the front foot, as the latest CFTC data highlights the ongoing theme of an unwinding of record short positions in the market. Short positions dropped in Friday’s data by 15%, or 25,639 contracts. Hark, this is the biggest drop in ten months. As the chart below illustrates, short positions are now at their lowest level since last November at 150,718 contracts. Nonetheless, although net longs increased because of the reduction in shorts, long positions actually edged lower; speculators are not necessarily turning crazy bullish on WTI…they are just turning less bearish.

CFTC WTI short positions

3) Financial positioning in Brent continues to be much more constructive, with ICE data showing the net long position for Brent has increased to a new record:

net longs

4) Azerbaijan has been the latest oil producer to join the chorus of those willing to freeze their oil production to support prices. And much like the rest of the chorus, it is a token gesture given Azerbaijan’s oil production is in decline. It produced 830,000 barrels per day in January, down 4% on year-ago levels, while production this year is forecast to drop even further.

5) It is amazing to consider that US natural gas prices are reaching new 17-year lows at the same time that US LNG exports are just getting going. The map below from the EIA illustrates the various stages of the projects that are underway in the US. In addition to Sabine Pass, which is the first terminal to start exporting LNG, there are a number of other terminals which are under construction: Cove Point, Maryland (0.82 Bcf/d), Corpus Christi, Texas (2.14 Bcf/d), Cameron, Louisiana (1.7 Bcf/d) and Freeport, Texas (1.8 Bcf/d).

Combine this with Sabine Pass’ permitted capacity of 4.16 Bcf/d, and LNG export capacity by 2020 will be 10.62 Bcf/d. That said, capacity is very different to actual volume. It is likely that much less, perhaps 7 – 8 Bcf/d, will be leaving US shores at this point.

US LNG infrastructure

6) According to its latest Five Year Plan announced over the weekend, China is delaying the completion of its strategic petroleum reserve beyond its original 2020 deadline. The leading emerging market has a target of accumulating