• 4 minutes End of Sanction Waivers
  • 8 minutes Balancing Act---Sanctions, Venezuela, Trade War and Demand
  • 11 minutes Mueller Report Brings Into Focus Obama's Attempted Coup Against Trump
  • 14 minutes What Would Happen If the World Ran Out of Crude Oil?
  • 5 mins Permafrost Melting Will Cost Us $70 Trillion
  • 3 hours California is the second biggest consumer of oil in the U.S. after Texas.
  • 19 mins Let's just get rid of the Jones Act once and for all
  • 19 hours At Kim-Putin Summit: Theater For Two
  • 19 hours NAFTA, a view from Mexico: 'Don't Shoot Yourself In The Foot'
  • 1 day UNCONFIRMED : US airstrikes target 32 oil tankers near Syria’s Deir al-Zor
  • 1 day How many drilling sites are left in the Permian?
  • 16 hours "Undeniable" Shale Slowdown?
  • 1 day New German Study Shocks Electric Cars: “Considerably” Worse For Climate Than Diesel Cars, Up To 25% More CO2
  • 1 day Nothing Better than Li-Ion on the Horizon
  • 11 hours Liberal Heads Explode as U.S. Senate Confirms Oil Lobbyist David Bernhardt as Interior Secretary
  • 19 hours Gas Flaring
  • 1 day Russia To Start Deliveries Of S-400 To Turkey In July
Alt Text

Saudi Oil Minister: We Won’t Ramp Up Oil Production Soon

Saudi Oil Minister Khalid al-Falih…

Alt Text

Oil Falls On Rising Crude Inventories

Crude oil prices fell slightly…

Alt Text

Trump’s Iran Decision Could Kill The OPEC+ Deal

Trump’s decision to let Iran…

ZeroHedge

ZeroHedge

The leading economics blog online covering financial issues, geopolitics and trading.

More Info

Trending Discussions

The Pen Is Mightier Than The Pump: The Danger Of Shorting An OPEC Deal

Around the time of the February oil crash, we first mused whether OPEC had developed a curious habit of jawboning oil prices higher with the help of flashing headlines at times of peak short positions among the hedge fund community, to launch HFT-momentum facilitated short squeezes.

We followed up most recently in an August post, when we said that "OPEC started releasing tactical headlines at key inflection points about an imminent oil production freeze (which not only never arrived but has since seen Saudi Arabia's output grow to record levels) which we first suggested were meant to trigger a short squeeze among headline scanning HFT algos, our suggestion was - as is often the case - dismissed as yet another conspiracy theory, although we admitted that "one can debate whether OPEC's "headline" leaks are timed to coincide with near-record short positions on WTI."

Fast forward several months later, when the question whether OPEC tactically times its statements to inspire short squeeze is the core topic of Morgan Stanley oil analyst Adam Longson's latest weekly report, in which he writes that while oil may continue to decline, he "would be nervous being short from these levels going into the meeting despite what appears to be a poor fundamental backdrop and our downbeat outlook for 2017." The reason: OPEC "has repeatedly made bullish announcements about OPEC intervention during periods of low liquidity (e.g. U.S. holidays), and whenever short positions become large."

Longson then warns that "if prices continue to slip, the chances for bullish OPEC headlines grow, which could lift prices briefly even if there is no follow through. OPEC desires a price above $50 and historically has started to talk whenever prices slip below $40. Thus, the cartel may choose to announce a headline deal to lift prices, even if there is no plan to execute it." His advice to traders: "Watch speculative short positioning, especially as prices erode."

In taking an amusing adage about trading against central banks, Longson adds that "investors have proven that they are not willing to press short positions against OPEC, even if the odds of intervention are low. In essence, this is similar to the old adage of “Don’t Fight the Fed.” Related: Why Should Investors Take OPEC Seriously Anymore?

Below is the key section from his latest weekly note:

Be Careful About Getting Too Bearish Ahead of OPEC Meeting

Poor fundamentals don’t prevent headline-related price reversals. Skepticism about the ability for OPEC to execute on its Algiers agreement is warranted. A number of producers are claiming exemptions, OPEC production is rising, greater cuts may be required to achieve the top end of the range, and OPEC has a poor compliance history. Reuters also suggested that Saudi Arabia threatened to raise production, and former Saudi Energy Minister Ali Al-Naimi stated that OPEC can’t cut by itself. Nevertheless, we would be nervous being short from these levels going into the meeting despite what appears to be a poor fundamental backdrop and our downbeat outlook for 2017.

OPEC can still spook markets. Although OPEC’s actions have not matched its words (i.e. promoting the need for production restraint while quietly growing production), the cartel has become adept at talking up declining markets. The group has repeatedly made bullish announcements about OPEC intervention during periods of low liquidity (e.g. U.S. holidays), and whenever short positions become large. Despite the fact that many investors are skeptical of OPEC’s ability to change the outlook, prices still move on these headlines. Investors have proven that they are not willing to press short positions against OPEC, even if the odds of intervention are low. In essence, this is similar to the old adage of “Don’t Fight the Fed.”

If prices continue to slip, the chances for bullish OPEC headlines grow, which could lift prices briefly even if there is no follow through. OPEC desires a price above $50 and historically has started to talk whenever prices slip below $40. Thus, the cartel may choose to announce a headline deal to lift prices, even if there is no plan to execute it. In other words, plenty of uncertainty and event risk remains. Watch speculative short positioning, especially as prices erode.

Related: OPEC Chaos Sees Oil Prices Fall

Swings in short positioning have coincided with many of the moves in oil this year. If shorts are emboldened by weakening fundamentals and fading confidence in OPEC, it’s possible for short positions to build. Along with lower prices, such developments generally bring strong bullish words from OPEC. Already we have heard supportive rhetoric. Algeria’s Energy Minster stated he is confident OPEC members will stick to the Algiers agreement. OPEC’s Secretary General noted that the cartel has made "significant progress" and is "on course" for a deal on Nov 30.

It is almost as if a major western investment bank(s) is coordinating not only OPEC's diplomatic strategy, but also advising the cartel just when to generate the flashing red-headlines to get the most bang for the buck...

By Zerohedge

More Top Reads From Oilprice.com:




Download The Free Oilprice App Today

Back to homepage

Trending Discussions


Leave a comment

Leave a comment




Oilprice - The No. 1 Source for Oil & Energy News