CEO REVIEW
We start July and the second half of 2024 having seen almost no change in the prompt Brent outright price, but having all been through a battering and bruising, nonetheless. So much has happened with so little material shift, and no clear winners, making this definitively the second worse outcome for traders in a given year. The ultimate worst would be the same unchanged market, but with a lot less volume traded, a la 2017.
The battle for the narrative has been fiercely fought, and even though the IEA v OPEC demand forecast seems immaterial to prompt prices given we are talking at least 1 year forward, it is about trader positioning today, placing their bets on the forward curve now that drives the price discovery and makes consensus calls so important. And the market still lives and dies by supply and demand consensus.
We started the year bullish, got some very clear signs to back this up with the strong refinery margins, and a tight North Sea market. This gave way to a prompt overhang, that was too sustained to be considered a blip, followed by product stop outs that made the margin give way.
Hedge funds saw the blood and went net short, minimised their longs, and yet the market held. A defiant cry from OPEC and a last gasp gamble from Gunvor on the Brent expiry last month somehow managed to save what we were starting to believe would be prices falling off a cliff edge like the end of 2018.
Now, banks have come back with almost all bullish, and some very bullish, balances for the rest of the year. The oil market PR machine is kicking back into gear, doing it’s best to stir up a bullish momentum with renewed vigour, which will be the last time it can this year. We are in the summer months that initial bullish bets were staked on, and bullish data has to come in thick and fast to make this really happen.
For us, it’s just too hard to avoid looking at the similarities of 2018. The market fought so hard to be bullish that year, and it proved to be a matter of propping up rather than a follow through, and it was the biggest oil companies that suffered most. That year, Unipec reported a multi-billion dollar loss from derivatives as prices plummeted in Q4, and it happened rapidly.
We can see this summer out okay, the market has proved its resilience during these months many times. It is also likely that the physical positioning has been gearing up all year for this moment, and so it will be hard to get in the way.
But September vs October timespreads for all products and crude we see as the inflection point. Hedge funds shorting and getting absorbed must been the trade houses and majors too on the length, and the backwardation in the forward crude market has held all the way through, meaning the very large and slow positioning the largest of traders make has been playing a “around the corner” trade that crystallises in the next couple of months. After that has been monetised, there is a steep drop waiting with the floor very far away.
