Scraping the Barrel
With OPEC+ seeing eye to eye on a one-month extension in the preliminary agreement, reactive oil market traders are reading between the lines. Traders are now thinking the critical risk for markets from here will be how US shale producers respond to the rebound in oil prices.
Although Brent traded through $40 as the price recovery came on sharper and faster than most had expected – helped by the perceptible dodging of filling physical storage – there’s an inclination to focus on demand as economies emerge from mobility restrictions, the OPEC+ cuts and the non-OPEC economic shut-in and curtailments.
But a funny thing happened on the way to the forum as OPEC+ has reportedly reached a preliminary agreement to meet the market’s bare bone expectations by extending the production agreement by one month.
Presumably, this is to allow a review of the May supply/demand data, as one of the main challenges for OPEC+ is the availability of hard data to judge the market in terms of OPEC+ compliance and non-OPEC production curtailment or underlying demand recovery before committing to a lengthier extension
This seems entirely sensible, but with oil markets susceptible to any negative news, it’s spooked the markets a touch as reactive oil traders are now reading between the lines. The main problem for OPEC+ is not so much compliance from small producers, rather it’s the potential for shale production to rebound. Even more so after both EOG and Parsley Energy flagged earlier in the week that they were preparing to restore shut-in production in the wake of the sharp rally in WTI.
Indeed, it might very well be that the sharper price recovery has raised some concerns among OPEC+ producers that highly price agile US producers will turn on the taps quickly and eat into OPEC+ share of the pie. So the critical risk for markets from here will be how US shale producers respond to the rebound in oil prices.
Still, lingering in the background is a plethora of traders who are universally concerned that sentiment for oil is running ahead of the fundamentals. Any red flashing headlines will be viewed as an opportunity to fade the rally.
The information is not to be construed as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product, or instrument; or to participate in any trading strategy. Readers should seek their own advice. Reproduction or redistribution of this information is not permitted.
Ongoing rate curve repricing and risk asset reaction perfectly illustrate how worryingly reliant investors have become on easy money policies