Don’t Believe The Oil Bulls

Oil prices were flat over the last week with Brent trading near $59 while WTI was near $53. On the bearish side traders continue to lament the lack of progress on US/China talks and generally weak fundamentals. On the bullish side we had some news of distress from the US shale patch while OPEC confirmed plans to remove barrels from the market through 2020.

Away from the oil market US stocks were broadly higher on strong earnings and hope that a Brexit deal could actually be possible in the coming weeks. As for economic forecasts, the IMF believes global growth will fall to its lowest level since 2009 this year due to US/China tariffs. OPEC's October monthly oil market report cut its 2019 global growth prediction from 3.1% to 3.0%.

Back to the bearish stuff, investors had a short-lived dance with optimism cheering a 'Phase 1' trade deal between the US and China last week which was dashed in favor of extended talks at the end of October. The two sides remain far apart on intellectual property, the US 'blacklist' of tech companies and several more issues. Negotiators now have to work against the next round of tariffs going into effect on December 15th. This was undesirable news in the same week where China's factory gate prices fell at their fastest pace in more than three years while China's import data for September revealed a fifth straight decline. As for fundamentals, Reuters poling has traders predicting a fifth straight US crude oil inventory build in this week's DOE report with stocks already at a healthy y/y surplus.

Back to the more bullish themes, Texas oil services firm ProPetro is reportedly cutting about 150 jobs as persistently sub $60/bbl US crude prices is taking its toll on the US shale industry. The story adds to a trend showing stress in the US producer patch which could turn impactful as crude output numbers stall. Overseas, OPEC leader Mohammad Barkindo reassured markets the cartel would continue to cut production in 2020 and beyond to keep a floor under the oil market. OPEC+ quotas are currently being adhered to with 136% compliance on pledges of a 1.2m bpd reduction into March 2020.

Looking ahead, we're seeing negative sentiment keep a lid on oil prices in the short term and it's hard to imagine a shift in attitude until US/China relations improve. This week in WTI markets option traders priced 30 delta call options at 32% implied volatility while 30 delta put options traded at 36% implied vol (revealing higher demand for downside risk insurance.) Brent traders also pushed term structure lower this week with the month 1 v. month 6 spread falling to +1.50 in another sharp reminder that the recent massive Saudi production outage was hardly a bullish match for the bearish macro backdrop. Perhaps its no surprise that long Brent positions held by hedge funds fell by more than 10% in the first week of October. It's going to be tough sledding for bulls until Trump and Xi get out of the way.