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Fool The Saudis Twice? Don’t Bet On It

Oil’s bear market shifted into overdrive this week following the largest daily selloff in three years. Brent futures dropped to $65 while WTI hit $55. Both grades have sold off by about $21 since early October. In dissecting the decline, the usual culprits seem to be at work; demand forecasts have dimmed, supplies from Russia, Saudi Arabia and the U.S. have been massive and the waivers granted to Iran’s eight largest customers have mostly negated the effect of sanctions.

The impact of the bearish cocktail pushing markets lower has been an immense buildup of crude oil which few predicted just two months ago. We are, after all, in a seasonal period where refineries should be working full tilt to produce distillate fuels and crude oil inventories should be falling. Instead, recent IEA estimates suggest that global crude stocks are increasing by 700k bpd. Physical markets are showing serious signs of bearish strain with Brent spreads flipping from strong backwardation into a flat term structure while WTI spreads have flipped into a deep contango. Both trends will only incentive traders to put more barrels into storage in order to sell them later (when prices on the curve are higher) as opposed to selling them to refineries now. Cash differentials also point to serious oversupply in pockets of the North America. In Canada the glut is becoming so large that major producers are lobbying the government to arrange a nationwide reduction in production.

The oversupplied…




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