Deja-Vu(lnerable): Oil Spikes 6% On Contango-Crush As "Violent Reversal" Higher Looms

WTI Crude is up over 6% in 24 hours, since yesterday's surprise build (and production cut) as the machines squeeze out an over-exuberant short positioning once again. However, just as we saw last year around this time, Astenbach's infamous oil veteran Andy Hall is warning a "violent reversal higher" looms again amid extreme positioning and potentially improving fundamentals. Exaggerating the move further is the surge in the contango which has once again made sea-storage profitable, sending yield-seeking traders into the carry trade (and squeezing shorts further).

As Bloomberg reports, despite what Hall called a “miserable month" for oil in July, supplies are still shrinking, he said in his letter, setting up prices to reverse themselves.

“Prices are now back at levels that would ensure the eventual bankruptcy of most of the oil industry," hammering both private oil companies and producing countries like Iraq, Nigeria and Venezuela, Hall said. “Prices at current levels are just not sustainable."

 

 

“The market is being driven by its own momentum and currently that is down," Hall wrote to investors in his Stamford, Connecticut, hedge fund, Astenbeck Capital Management LLC.

 

“But extreme positioning coupled with improving fundamentals should ultimately – and at potentially any time – result in a strong reversal."

 

And we note a major case of deja vu all over again...

Last August/September oil prices exploded 25% in just a few days as options markets were manipulated (chatter at the time was Hall faced big losses and used call vol to squeeze a heavily short positioned market) to create the most violent reversal ever in crude...

 

However, even more worying for front-end shorts is return of the carry trade...

Six-month Brent contango structure now covers cost of dirty VLCC time charter for same period, making it economical to store crudes that are priced off benchmark, according to Bloomberg survey of 6 traders and analysts.

 

VLCC time-charter rate for 6 months at $25k-$28k/day, say 2 shipbrokers, 1 charterer; that’s equivalent to $2.25- $2.52/bbl for the half-year period

 

 

Brent’s 6-month contango has averaged $2.83/bbl this month, higher than the freight cost

 

Contango has widened almost 4 times from its narrowest level for this year on April 29

In other words, the moment the contango got big enough to be profitable, everyone started loading oil back again on to tankers... hoping to earn a modest yield on the carry trade. But this kind of demand is temporary (as the chart above shows).