CEO REVIEW
Outright prompt month Brent has been resilient this month, with longs selling out of contracts in all major futures and building up a net short position from Money Managers. Looking at the volumes required to make this shift, it is surprising that we aren’t in the low 70s. Of course, it could be that post the OPEC+ meeting the last bit of buying flow holding up the contract gives way and we do get a material sell-off, but nonetheless, we start June having weathered much of the sell side storm.
The wave of selling was not just in outright Brent. The Q3’24 refinery margin has been hammered, as the market’s net position, which was evidently long and has been since early Q1, gave way to selling pressure with a wave of stop outs. Talk of hedge funds exiting oil has come up at the end of the month which makes sense given the pain felt particularly in gasoline of late.
When “new” money comes into markets – is it a good thing? In short, I think yes if it is hedging flow, no if it is speculative. All that additional speculative flows do in this market, is add more capital to the herd positioning, which tends to follow a generic supply and demand consensus position. Given this is the same position that the market will trade against the hedging flow that is there, the liquidity of the new speculative flow is competing with the same hedging flow, and this therefore exacerbates moves in a fight for liquidity. Power markets are seeing this also, as everyone has seen the swathes of cash being generated in the last few years. These hedge funds hire fundamentally focused directional traders from trade houses, they are then in, that exacerbated market then chops people out of positions, and they are out again. The problem is they are not adding much to the market. They don’t have the balance sheet might of a Vitol or Citadel – so they can’t ride out the pain. They also don’t have detailed trade risk management – it is mostly shoot from the hip. So, in the end this just causes bad volatility and after a while things go back to normal.
Now that we’ve had such aggressive stop outs across the barrel, there is still the lingering, and rapidly evaporating, hope that summer strength in the markets will prevail. Brent expiry in May (July cargos) looked destined for a deep contango, following persistent weakness in the prompt crude market in Europe and consequent deep negative levels in CFDs and Balmo DFL. The first trade was a -65c sell, which is by anyone’s thinking a level that indicates a very weak market, and for that to be for cargos 2 months out, is very concerning as a proxy for the global crude balance. However, as the crude section will dive into, we ended up trading up to +10c with a lot of cargos trading in between – so where are we left now?
It’s hard to get very excited about being bullish, but as mentioned we have weathered the storm and yet margins are still ok whilst outright Brent prices have held up. A now speculatively short market hasn’t reacted to a convoluted OPEC+ meeting, telling us from a positioning sense at least, summer strength is still a genuine possibility. Particularly as those trade houses who need to hold onto positions only have a few weeks to wait until pricing can take over and largely control the final pricing of the differentials being traded. If you had been planning for this all year, and weathered market stop outs, you would be feeling quite ready to go for it into pricing would you not?
