Thursday, February 16, 2017

"Why a NYMEX Veteran is Getting Nervous about Oil"

From Wolf Street: 

Being long oil is a very “crowded trade,” but who’s on the other side of that trade, and what do they know that speculators don’t?
“Crowded trade” is an infamous phenomenon. It’s when traders are all betting on the same direction of a trade. But each trade must have someone else betting on the opposite direction. So who is on the other side of a “crowded trade?” And what do they know that these traders don’t?

And what happens when the traders in the “crowded trade” are all looking for an exit, and suddenly the entire psychology changes?

Oil markets may have reached that point, according to Dan Dicker, a 25-year veteran of the New York Mercantile Exchange where he traded crude oil, natural gas, unleaded gasoline, and heating oil futures contracts. In Oil & Energy Insider, he writes:
When I was standing shoulder to shoulder with all those other oil day traders on the floor of the NYMEX, once in a while I’d get a very funny feeling. All of a sudden, I’d realize that the position I’d built up for myself was largely shared by just about everyone around the ring – and I also sensed that every other trader had had the exact same realization.
That’d be a wary moment – staring around at each other like combatants in an old west quick draw. We’d all still be convinced still in our positions, of course. We, collectively, could be entirely right on the coming trend and just need some patience to all make some money. But we also knew that the first guy to flinch in panic could set off a complete avalanche of traders suddenly becoming less convinced and trying to get out.
I called this “the porthole effect”: The boat might or might not be sinking, and you couldn’t tell through the small hole that was available to you; but if one guy jumped into the porthole trying to escape, he was likely to cause a mob scene of panicked passengers all fighting to squeeze out of that entirely too small of an exit.
This is kind of what I’m seeing in the oil market today.
While “there is a lot to like” in the oil markets, there are also other dynamics at work. The Numbers Report of Oil & Energy Insider spells out some of them.

OPEC members have cut more than 1 million barrels per day (mb/d) in production. That’s less than their promised cuts of 1.2 mb/d made during their November meeting. The deal is further being undermined by some OPEC members, including Nigeria and Libya which are exempt from the deal:
  • Libya has added 162,000 bpd since the deal was announced;
  • Nigeria has added 12,000 bpd but might add a lot more (see below);
  • Iran has brought back 110,000 bpd.
With those additions, net OPEC cuts are “closer to 800,000 bpd,” according to the Numbers Report. Plus, Libya and Nigeria are trying to restore more idled capacity.

Nigeria’s oil production plunged from 2.2 mb/d in 2015 to a low point of 1.4 mb/d in the summer of 2016 due to the attacks by militant groups on oil targets. Production has since edged up to only about 1.6 mb/d. The government is struggling to restore output. It has reinstated a program to pay militants to lay down their weapons. If this improves security, pipelines and export terminals could be repaired, and about 500,000 bpd could come back on line, which would crush much of the OPEC production cut.

The 11 non-OPEC oil producers, including Russia, that had agreed to cut production along with OPEC, have only delivered 40% of the promised cuts in January, according to two OPEC sources cited by Reuters on Friday. The sources in turn cited OPEC calculations based on data from the IEA. Part of the lack of compliance is said to be due to the phased implementation of the cuts by Russia....MUCH MORE
In the bad old days the last few weeks of U.S. inventory builds would have knocked the futures down by 10-15% and the fact they didn't is cause to wonder: WTH, WTI? $53.96 up 0.36 today.: