Kemp: Brent Prices Caught In The Calm Before The Storm?



Kemp: Brent Prices Caught In The Calm Before The Storm?
Crude oil traders have started to price in the resumption of North Sea shipments, with spot prices stalling and nearby calendar spreads returning to previous levels.

Reuters

(John Kemp is a Reuters market analyst. The views expressed are his own)

LONDON, Dec 20 (Reuters) - Crude oil traders have started to price in the resumption of North Sea shipments on the Forties pipeline, with spot prices stalling and nearby calendar spreads returning to levels before the pipeline was shutdown.

Pipeline owner Ineos is working on several repair options and said it expects operations to resume within 2-4 weeks of the original shutdown on Dec. 11 ("Ineos awaiting custom parts to fix Forties oil pipeline", Reuters, Dec. 19).

Brent futures for delivery in February have eased back to under $64 per barrel from a high of almost $66 immediately after the shutdown, and are no higher than they were at the start of November.

The February-March calendar spread has shrunk to just 31 cents backwardation from a peak of nearly $1 per barrel, and is almost back to where it was before the rupture (http://tmsnrt.rs/2z3ZeHS).

Calendar spreads for the first six months have continued to tighten, but in line with the pre-shutdown trend, and now show little impact from the disruption.

The strong and consistent rally in crude and products prices between the end of June and early November appears to have petered out, at least for the time being.

Hedge funds and other money managers are sitting on a record bullish position in Brent futures and options and a near-record position in crude and products derivatives more generally.

But with the exception of Brent, there has been no significant advance in positions in U.S. crude, gasoline and heating oil, as well as in European gasoil since the second half of November.

In fact, hedge funds have lightened their bullish positions in WTI, gasoline and European gasoil since the end of last month, as fund managers have taken some profits after the rally.

The build up of a massive bullish long position in oil and the limited number of short positions that remain to be covered as itself become a major risk to prices.

In the past three years, a large imbalance between hedge funds' long and short positions has normally preceded a sharp reversal in the price trend.

The current imbalance, with hedge funds holding almost nine long positions in crude futures and options for every short position, is among the largest on record.

So far, the outage on the Forties system seems to have discouraged more short-selling and kept oil prices stable just below their recent highs.


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