WTI Crude is up over 6 percent in 24 hours since yesterday's surprise build (and production cut), as the machines squeeze out an over-exuberant short positioning once again. However, just as we saw last year around this time, Astenbeck's infamous oil veteran Andy Hall is warning that a "violent reversal higher" looms again amid extreme positioning and potentially improving fundamentals. Exaggerating the move further is the surge in the contango which has once again made sea-storage profitable, sending yield-seeking traders into the carry trade (and squeezing shorts further).
As Bloomberg reports, despite what Hall called a “miserable month" for oil in July, supplies are still shrinking, he said in his letter, setting up prices to reverse themselves. “Prices are now back at levels that would ensure the eventual bankruptcy of most of the oil industry", hammering both private oil companies and producing countries like Iraq, Nigeria and Venezuela, Hall said. “Prices at current levels are just not sustainable."
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“The market is being driven by its own momentum and currently that is down," Hall wrote to investors in his Stamford, Connecticut, hedge fund, Astenbeck Capital Management LLC.
“But extreme positioning coupled with improving fundamentals should ultimately – and at potentially any time – result in a strong reversal."
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And we note a major case of deja vu all over again...
Last August/September oil prices exploded 25 percent in just a few days as options markets were manipulated (chatter at the time was Hall faced big losses and used call volume to squeeze a heavily short positioned market) to create the most violent reversal ever in crude...
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However, even more worrying for front-end shorts is the return of the carry trade...
Six-month Brent contango structure now covers cost of dirty VLCC time charter for the same period, making it economical to store crudes that are priced off benchmark, according to Bloomberg survey of 6 traders and analysts.
VLCC time-charter rate for 6 months at $25k-$28k/day, say 2 shipbrokers, 1 charterer; that’s equivalent to $2.25- $2.52/bbl for the half-year period
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Brent’s 6-month contango has averaged $2.83/bbl this month, higher than the freight cost
Contango has widened almost 4 times from its narrowest level for this year on April 29
In other words, the moment the contango got big enough to be profitable, everyone started loading oil back again on to tankers... hoping to earn a modest yield on the carry trade. But this kind of demand is temporary (as the chart above shows).
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By Zerohedge
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Will be interesting if there is a sudden collapse in the import numbers and people start to freak out trying to explain why. The hidden barrels being finally counted was always going to be a necessary step in the re-balancing process, but it's being hard sold by shorts and people gambling on their $35 options as a sign of boosting production.