Hedgies Have Never Been 'Longer' The Energy Complex As Analysts Raise Oil Price Forecasts (Again)

Tyler Durden's picture

With WTI prices holding at 6-month highs around $54 (and Brent at $60), Reuters' John Kemp notes that hedge funds have never, ever been more bullishly positioned in the entire energy complex.

Hedge Funds have accumulated a record 1.189 billion bbl of long positions in the five major petroleum contracts (Brent, WTI (x2), RBOB, HO)...

This surge in buying is coming as analysts once again follow the trend and begin raising oil price forecasts.

As OilPrice.com's Tsvetana Paraskova notes, just a few of months ago, analysts and investment banks slashed their oil price forecasts as OPEC’s production cuts drew down the global oil oversupply slower than initially expected, and rising U.S. shale production capped any short-lived oil price gains.

But at the end of the summer, as OPEC and the International Energy Agency (IEA) started reporting stronger-than expected global oil demand growth and an accelerated pace of inventory declines, the market sentiment began to change. As 2018 and the November 30 OPEC meeting draw nigh, the cartel is said to be favoring a 9-month extension of the deal through the end of next year.

The possibility of such supply restriction throughout the whole of 2018 - combined with expectations of strong oil demand growth and concerns over few new sources of supply due to years of underinvestment after the 2014 oil price crash - has prompted some analysts to warn that fear of the glut will turn into fear of a supply crunch next year. In addition, some investment banks expect the U.S. crude oil production in 2018 to underperform forecasts, which could remove some part of the cap on oil prices that American shale has kept since the start of this year.

Analysts at Jefferies see WTI at $55 per barrel by the end of 2018, and the Brent price is expected at $58.

However, Jefferies warned that U.S. production growth next year could be lower than expected.

“While the U.S. is out-punching on growth this year, [Jefferies'] bottoms-up forecast suggests that the U.S. could under-deliver on oil growth in 2018,” the investment bank said a report, as carried by Marketwatch.

 

“We believe that the backwardation in the Brent futures strip supports our thesis that the market is currently undersupplied, and if the OPEC/non-OPEC cuts are extended through the end of 2018 then we estimate the oil market will remain in modest under-supply until 2019,” according to Jefferies.

Like many analysts and oil companies, Allianz Global Investors warns that the lower-for-longer oil prices have suppressed investment in exploration and new projects, which could result in a shortage of supply soon.

“An abundance of oil, thanks largely to U.S. shale, has pushed down oil prices and sector sentiment. But since that means less investment in new production sources, the bearish market may soon rebalance from fears of oversupply to concerns over shortages—which would push prices higher,” said Neil Dwane, global strategist at Allianz, in a note quoted by MarketWatch.

Bank of America Merrill Lynch also expects a supply shortage of 230,000 bpd this year. The bank also raised its WTI and Brent projections for the short term, seeing Brent prices averaging $54 in Q4 2017 and $52.50 in the first half of 2018, up from the previous estimates of $50 and $49.50, respectively. BofA Merrill Lynch also revised up its WTI price forecast to $49 this quarter, compared to the previous $47 estimate.

As of Friday, both WTI and Brent were trading at least $3 above that average forecast for Q4.

RBC Capital Markets also raised its oil prices forecasts for next year—albeit by just a dollar or two. WTI is now seen averaging $51 next year, up from the previous $50 a barrel forecast, while the Brent price view was raised to $55 from $53.19.

Regarding U.S. oil production growth, RBC Capital Markets differs from Allianz and Jefferies and is optimistic on American oil production at least until 2019. RBC Capital Markets lifted their forecast for the total U.S. crude production growth in Q4 2018 to 870,000 bpd from 850,000 bpd, and revised up the 2019 growth estimate to 810,000 bpd from 756,000 bpd.

In its latest Short-Term Energy Outlook, EIA expects total U.S. crude oil production to average 9.2 million bpd this year and 9.9 million bpd next year, which would mark the highest annual average production in U.S. history, beating the previous record of 9.6 million bpd set in 1970.

Rising U.S. crude production and gains from other non-OPEC countries will likely act as “the ceiling for aspirations of higher oil prices” next year, the IEA said earlier this month.

According to Standard Chartered, shale activity has been declining as a reflection of rising costs, a drop in initial well productivity, increased breakevens outside the sweetest geological spots, and “cash-flow constraints at unsustainably low prices.”

“However, the turn down in drilling has yet to temper the optimism of most forecasts of U.S. output growth in 2018,” Standard Chartered said in a note quoted by Reuters.

While banks and analysts were quick to slash their oil price projections earlier this year, some of them are now very cautiously lifting their forecasts by slim margins. Still, voices are growing that a supply crunch may come sooner rather than later, and that U.S. shale resilience may have been overestimated. 

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Edward Morbius's picture

In early summer gas prices popped 15 cents a gallon and the meme was "they are shifting to pricier summer blends". Where was the 15 cent drop when summer ended? Fuck them all.

earleflorida's picture

nothing matters today when oil/ gas energy or [a] QE or Tightening of the supply in [any] commodity as they control all species of commerce

Arnold's picture

These guys are high, thinking that increased demand will fuel shortages.
I do agree with their conclusion, however.

It will take more declining dollars to buy the same quantity of oil.

hola dos cola's picture

Declining dollars... All that's wanted is inflation. Oil will be ramped to the moon for as long as your life can be made more expensive.

 

 

 

pst...., there are some amazing upgrades in the pipeline, worldwide, your analysts won't tell you about. So, go with the flow and make the most of it. But don't worry about supply issues (unless a bottleneck turns into a warzone)

earleflorida's picture

supply and demand --- the cornerstone / foundation of a seemingly (archaic?) free market system for milleniums is but a pebble wane`afloat the autumns winded money-masters waxed`whims

hola dos cola's picture

That'll be soon enough. Brent --> 58--->54---> maybe50. That's without a price war ;-)

Sapere aude's picture

of course U.S. oil production will be down next year and exponentially after that, as decline rates and Red Queen Syndrome make the current claims on production impossible.

That is why the relentless attacks on the internal combustion engine is taking place, that is why the ridiculous comments on CO2 are highlighted by some, who are directly paid in grants and payments for climate change, etc. etc., so will never say anything else.

Yet independent reports show C02 assists world food production with no adverse affects, and its ridiculous to have statistics made to measure, when in the industrial revolution smoke from coal fired boilers everywhere filled the air.

When you are FORCED to buy electric vehicle you might look back at this post and have a Eureka moment.

The reason is clear....the usa and the West has perpetrated one of the biggest cons in history....suggesting an oil glut that they know did not exist and where the opposite was the problem hidden from us all.

With current oil requirements growing every year, contrary to the fake news, some of which I see on this BB about reducing oil use (Rubbish). With the world's Super Giant oilfields in terminal decline and with oil use shortly to exceed 100,000,000bbls a day, there is simply no way it can fulfil the needs of the planet, so the 'glut' idea was to stave off that day, and keep a lid on oil prices, hoping other countries would not see the emperor was wearing no clothes.

So forced EV vehicles for the future, will be the next move, but even that will be too little too late to prevent $150 oil, as the propaganda machines fall apart.

In many parts of the world there is already queuing for oil and petroleum, and these countries that have been bombed out of existence will all require substantial oil resources to rebuild.

Incidentally they are the cleanest they have ever been, and now clean technology means mile for mile they are cleaner than the EV's!

Let's forget that the Tesla3 battery is alleged to be equivalent of driving diesel for 8.2 years and is likely to last less than that in sub optimal conditions, where it was designed for California, but try getting the mileage in Alaska with the heater on etc etc.

Try replacing a battery that fails? With shortages already in batteries for Tesla vehicles, and the attempts at governments to FORCE internal combustion producers off the road, it will require vastly more batteries just for new vehicles....so how will you get a replacement battery when every last battery is for producing newer vehicles?

How will the INCREASED energy requirement of EV's be met? How will we cope with the massive inefficiency in power losses encountered throughout EVs, from the grid, to the home, from solar to inverter, from inverter to grid, from inverter to bidirectional inverter, from battery back to inverter and then to charge the car! Every stage introduces more inefficiency.

How will we cope, when even at present you might have TWO charging points at service stations....the potential for queues of very disgruntled EV drivers paints its own picture.

Will we see these same pseudo scientists complain about ever increasing pollution caused from mining the rare earth minerals and materials necessary for the production of EVs. Check out the Jiangxi rare earth mine in China if you want to see how extensive that pollution is, with toxic waste.

Or where in some countries the power supply to residential homes makes it currently impossible to charge vehicles at home without changing the main fuses to the home, which can only be done by the utility companies and where the increased load through existing residential wiring is a potential safety hazard.

So when we see the forced denial of purchasing internal combusion engine vehicles through taxation, fake news etc., just spare this thought.

Why do none of the climate pseudo scientists, pollution 'experts', etc. etc., ever mention the pollutants and gases from bombs, with carpet bombing in Syria, Yemen, etc., all of that must be environmentally friendly!