Five oil signals to watch as 2018 pits OPEC against shale
Oil traders are going to have their work cut out for them in 2018.
OPEC and its allies are heading into the second year of supply cuts to wipe out the global oil glut, while rising US output is threatening those efforts. Geopolitical tensions also add a wild card to the market mix.
As oil watchers seek to plot a course through the year ahead, they’ll be paying close attention to signals ranging from time-spreads to options contracts. Here are five key barometers to watch as 2018 unfolds:
- The Shale Signal
WTI’s discount to Brent closed at its widest level in more than two years on the 26th December as an explosion at an oil pipeline in Libya boosted the global benchmark. That came after Hurricane Harvey kept supplies locked in the US earlier in the year, providing the first trigger for a wider spread and bumper US exports.
With shale growth driving forecasts of record US supply in 2018, that could lead to a further expansion in the discount, which neared US$7 a barrel on the 28th December. “If we get more shale and Canadian crude in the first half, and OPEC cuts hold, then it should widen,” said Richard Fullarton, founder of London-based commodity hedge fund Matilda Capital Management Ltd.
- OPEC’s Bellwether
Brent crude surged into a bullish, backward-dated structure this year as OPEC-led output cuts tightened global supplies.
December 2018 futures climbed to their highest premium ever versus the same month for 2019 this week, and the spread may expand further as OPEC’s cuts drive the oil market toward balance next year, according to Abhishek Deshpande, head of oil research at JPMorgan Chase & Company. “We are more comfortable with a balanced market to take a view of going long that spread,” Mr Deshpande said.
- Lottery Tickets
With geopolitical risks flaring in a host of major oil producers, funds have been busy snapping up bullish oil options contracts that would profit from a sharp spike in crude prices. The December 2018 $100 call remains the most-held Brent options contract, while $80 calls equating to more than 30 million barrels for the latter part of next year traded in recent weeks. Venezuela, Iran and Saudi Arabia top the list of countries that could see oil-related disruptions in 2018, RBC Capital Markets LLC analysts including Helima Croft wrote earlier this month.
- Volatility Vacuum
Despite those risks, volatility has plunged to the lowest in more than three years in recent weeks as a steady grind higher in prices took some of the fizz out of the oil market.
With the Organisation of Petroleum Exporting Countries clearly signposting its plans for 2018, banks including Société Générale SA expect to see a continued slide in volatility this year. “OPEC’s decision to proactively manage the market is going to keep volatility flat as a pancake,” Amrita Sen, chief oil market analyst at Energy Aspects Ltd, wrote recently.
- How Long?
The market is heading into 2018 near a record number of bullish bets in Brent and WTI combined, exchange data show. Those contracts, which now outstrip bearish ones by seven to one, have led to concerns that crude may soon see a speculator-driven slump.
That bullish positioning has been “the largest bearish cross in my scorecards for the last several weeks,” said Torbjorn Kjus, chief oil analyst at DNB Bank ASA. What is difficult is that “we don’t know the type of players. If they want to have a larger part of their assets in commodities for the next couple of years, then they’re not going to sell those positions.”