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Saudi Crackdown Was A “Classic Head Fake” For Oil Prices

Overnight, following the recent Saudi turmoil, prices in the crude complex jumped to the highest levels in over two years, amid speculation that Saudi Arabia is more likely to back output curbs following this weekend’s crackdown by Crown Prince Mohammed bin Salman. "It creates some hope that the current policy by the Saudis will be continued after March,” said ABN Amro senior energy economist Hans van Cleef. "We’re still in the longer-term upswing, the uptrend is still intact", and indeed Dec. WTI rose +31c to $55.95/bbl after earlier touching $56.28, the highest since July 2015, while Jan. Brent was also up +35c to $62.42, after rising to $62.90, highest since June 2015

And yet not everyone believes that the recent chaos in Saudi Arabia is a bullish catalyst for oil: taking his usual contrarian stance, Bloomberg commentator and ex-Lehman trader Mark Cudmore writes that what happened is "largely irrelevant" for oil prices and the resultant oil price spike has "the look of a classic head fake and may mark the final push higher before a correction."

Attacking the key point underscored by oil bulls, Cudmore says that "an extension of OPEC supply cuts is fully expected by the market, and the weekend changed nothing on that front" meanwhile "oil prices are still dominated by the overhang of potential supply that can come online so easily from U.S. shale fields. The rig count may have been dropping recently, but it remains 62 percent above the level of a year ago. And, crucially, U.S. production is near the highest in more than two years, according to the Energy Information Administration."

Furthermore, Cudmore is confident that what is taking place with oil is "narrative drift" and goal seeking to justify a bullish bias as "there’s been a preponderance of bullish oil notes during the past week. Drawdowns in global inventories are getting investors excited, especially since crude trades at the highest levels in more than two years. But stockpiles are still very large historically and it’s the elevated price which makes oil look so vulnerable." Meanwhile, positions are at an extreme, with "long positions are the most stretched since March according to Friday’s CFTC data" while "Less talked about news from the weekend was Mexico announcing the largest onshore oil discovery in 15 years. That’s only going to impact supply in the long-term, but it may remind traders that the overall macro dynamics of the oil market haven’t changed -- not least from some domestic political news in Saudi Arabia." Related: The Boy Genius Tackling Energy’s Toughest Problem

In short: Cudmore is happy to take this opportunity to reset short positions not only because the current oil price spike will send US production into overdrive but because "demand growth will continue to be undermined by innovation in other energy fields, while technology keeps reducing the cost of extraction and production. Those factors are both very long-term but a potentially misunderstood news- driven spike may be a good time to focus on them again."

Incidentally, Cudmore's note is precisely what the WSJ discussed overnight in "Saudi Crackdown Doesn’t Guarantee Aramco IPO – Or Higher Oil"

Mark Cudmore's full note below:

Oil Prices May Be in the Process of Topping Out: Macro View

Crude prices jumped at the open Monday on largely irrelevant news from Saudi Arabia. It’s got the look of a classic head fake and may mark the final push higher before a correction. 

The purge in Saudi Arabia is more of a domestic story. Crown Prince Mohammed bin Salman was already perceived to be driving the country’s oil policy, so consolidation of his power shouldn’t result in any strategic shift.

An extension of OPEC supply cuts is fully expected by the market, and the weekend changed nothing on that front.

Oil prices are still dominated by the overhang of potential supply that can come online so easily from U.S. shale fields. The rig count may have been dropping recently, but it remains 62 percent above the level of a year ago. And, crucially, U.S. production is near the highest in more than two years, according to the Energy Information Administration.

There’s been a preponderance of bullish oil notes during the past week. Drawdowns in global inventories are getting investors excited, especially since crude trades at the highest levels in more than two years. But stockpiles are still very large historically and it’s the elevated price which makes oil look so vulnerable.

Related: The Geopolitical Implications Of Renewable Energy

Long positions are the most stretched since March according to Friday’s CFTC data.

Less talked about news from the weekend was Mexico announcing the largest onshore oil discovery in 15 years. That’s only going to impact supply in the long-term, but it may remind traders that the overall macro dynamics of the oil market haven’t changed -- not least from some domestic political news in Saudi Arabia.

Demand growth will continue to be undermined by innovation in other energy fields, while technology keeps reducing the cost of extraction and production. Those factors are both very long-term but a potentially misunderstood news- driven spike may be a good time to focus on them again.

By Zerohedge

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  • roger on November 06 2017 said:
    the price will drop back to below $50 soon. the fundamentals don't support such high price right now
  • Disgruntled on November 06 2017 said:
    I don't know if the zero guys are keeping up with the erroneous EIA production numbers for crude, but it's been demonstrated that they are overstating US production by 300,000 bopd as of the first of September. Their prediction of 9.9 mmbopd by the end of 2017 is laughable. The rig count is slowly declining and it appears that the horizontal guys have figured out that by restraining production and keeping it close to 9.2 mmbopd for the US, the price will recover and every $5/bbl gain in price is the equivalent of drilling several 2500 boepd wells for companies the size of CLR, EOG, PXD, etc. Pretty simple: you realize more revenue by holding still. And they better use the extra $$ to pay off debt!
  • Paul on November 07 2017 said:
    The "value" of Aramco will be determined by the price of oil at the time and the stock exchange that assigns the offering price and shares offered, both of which are at the discretion of the Prince, soon to be King. To attain 2 trillion valuation, the price of oil will need to be closer to $80.00.

    Shale oil production in the USA is being held back for higher prices in the future as the rig count has dropped off as prices have risen. If the largest producers in the world, USA included, collectively desire higher prices, then higher prices we shall pay.

    Trump and Salman appear to be open to making deals and maybe they end up listing on the NYSE. The problem is compliance with reporting requirements although that may finally be getting addressed.

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