Thursday, October 02, 2014

Hallelujah, it’s Bearish Brent!

Mercury is not rising (at least where this blogger is), it’s not half past 10 (more like half past four), and it’s certainly not for the first time in history, but Hallelujah it’s Bearish Brent!

Sorry, a rather crude attempt to re-jingle that ‘80s hit song, but on a more serious note there is a bit of a commotion in the oil markets with bears roaming the streets. As the readers of this blog would testify, the Oilholic has short called Brent for a while now. Being precise, the said period covers most of the past six and current Brent front-month contracts.

Aggressive yelling of the word 'risk' proved this supply-side scribe wrong for June, but one has been on the money most of the time since the summer. July’s high of US$115.71 per barrel was daft with speculators using the initial flare-up in Iraq as a pretext to perk things up.

The Oilholic said it would not last, based on personal surmising, feedback from physical traders and their solver models. And to the cost of many speculators it didn’t. As one wrote in a Forbes post earlier this week, if an ongoing war (in the Middle East of all places) can’t prop up a benchmark perceived to be a common proxy for oil prices on the world market, then what can?

Rather controversially, and as explained before, the Oilholic maintains that Brent is suffering from risk fatigue in the face of lacklustre demand and erratic macroeconomic data. In Thursday’s trade, it has all come to down to one heck of a bear maul. Many in the City are now wondering whether a $90 per barrel floor might be breached for Brent; it already has in the WTI’s case and on more than one occasion in intraday trading.

All of this comes on the back of Saudi Arabia formally announcing it is reducing its selling price for oil in a move to protect its share in this buyers’ market. The price of OPEC basket of twelve crudes stood at $92.31 dollars a barrel on Wednesday, compared with $94.17 the previous day, according to its calculations.

With roughly 11 days worth of trading left on the November Brent front-month contract, perceived oversupply lends support to the bears. Nonetheless, a bit of caution is advised. While going short on Brent would be the correct call at the moment, Northern Hemisphere winter is drawing closer as is the OPEC meeting next month. So the Oilholic sees a partial price uptick on cards especially if OPEC initiates a production cut.

The dip in price ought to trouble sanction hit Russia too. According to an AFP report, Herman Gref, head of Sberbank, Russia’s largest bank, said the country could repeat the fate of the Soviet Union if it doesn't reform its economic policies and avoid the "incompetent" leadership that led to the end of communism.

Speaking at the annual “Russia Calling” investment forum in Moscow, Gref said Russia imports too much, is too reliant on oil and gas exports and half of its economy is monopolised. The dynamic needs to change, according to Russia’s most senior banker, and one employed by a state-owned bank.

Away from Russia, here is the Oilholic's latest Forbes post on the prospects of shale exploration beyond North America. It seems initial hullabaloo and overexcitement has finally been replaced by sense of realism. That said, China, UK and Argentina remain investors’ best hope.

On a closing note, while major investment banks maybe in retreat from the commodities market and bears are engulfing it for the time being, FinEx group, an integrated asset management, private equity and hedge fund business, has decided to enter the rocky cauldron.

Its specialist boutique business – FinEx Commodity Partners – will be led by Simon Smith, former Managing Director and Head of OTC Commodity Solutions at Jefferies Bache. That’s all for the moment folks! Keep reading, keep it ‘crude’!

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To email: gaurav.sharma@oilholicssynonymous.com

© Gaurav Sharma 2014. Photo: Disused gas station, Preston, Connecticut, USA © Todd Gipstein / National Geographic.

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