For a free inquiry regarding your custom research needs, please fill out your request and/or questions in the contact section of this site.
Sample Only: Research note issued December 12th, 2016, exactly as it was released:
Macro Theme: Higher Oil on OPEC/non-OPEC Production Cut Implementation Exceeding Expectations with Historic Cooperation
OPEC/non-OPEC petroleum energy producers will continue to cooperate until the crude oil complex balances in the $55-60 WTI range and beyond. The downside risk of prices falling below $48 WTI have been muted dramatically by the recent supply limiting deals struck in Vienna. On the demand front, fiscal policy in the US will be supportive of infrastructure led consumption gains. Increased US shale production “offsets” triggered at higher levels will take the punch out of one way oil spikes above $60 WTI for the time being, setting up a high probability spot WTI range of $48-60 with a supply constrain-propelled magnetic pull toward the higher end of the range.
Catalyst Non-OPEC producers agreed on December 10th in Vienna at the OPEC Secretariat to production cuts of 558k bpd beginning in January of 2017, as well as being subjected to a committee of three OPEC plus two non-OPEC members monitoring implementation of the cuts. We see sentiment leaning strongly to the upside for the crude oil complex. This is expected to persist until crude prices consolidate in the $55-60 per barrel range toward the end of Q1 2017. The agreed upon reductions are 1.2MM bpd by OPEC members plus 558k bpd by non OPEC members, totaling nearly 1.8MM bpd of cuts from a January 2017 baseline.
What Isn’t Priced In?
Skepticism surrounding the effectiveness of production cut implementation is overdone. The main point to consider is that oil producers are cooperating in a way that hasn’t been seen in 15 years. It is their motivation and willingness to act that is important. They will not allow another price collapse to occur simply because they can not afford for this scenario to play out. Saudi Arabia is against the ropes when it comes to public finances. It needs a bridge period of 5 years of stable prices to transition into fully diversified sovereign wealth investments and raise funds with a successful Saudi Aramco partial IPO. Most other producers have been caught off guard by the severity and persistence of oil market declines since mid 2014, bottoming out at 70% declines.
It is less than certain whether these particular deals struck in Vienna will be the catalysts to propel higher and stable prices. What is closer to high conviction certainty is the incentive for struggling oil exporting nations, and in the case of Venezuela, downright desperation, to ensure the bottom doesn’t fall out of the oil market again. This, along with the preliminary concrete steps already taken in the past couple of weeks, leaves us with a high conviction, favorable asymmetric risk long crude oil market setup. It is crucial to act on this conviction on any notable dips below $52.50 in WTI as the higher prices move, the less favorable the asymmetric risk is for this oil producer cooperation theme. Increased US shale production and strong dollar headlines will begin hitting the newswires as we approach $55 and keep prices in a choppy range between $55-60 for the majority of Q1 2017.
Entry and Exit Levels
WTI crude oil is a high conviction buy at $52.50 per barrel with a target of $60 and stop below $48. Downside risks to this call include, primarily, a breakdown in the implementation of production cuts agreed to at the November 30th OPEC meeting and the December 10th OPEC/non-OPEC meeting. Assist FX’s attendance of both OPEC events bolstered the conviction of this trade idea based on renewed confidence in the oil ministers to follow through on the historic agreements in ways previously doubted by skeptics.