1938
History calling
Macro
Markets are currently repricing down a resolution of the Ukrainian conflict, which would see the reversal of sanctions on Russian oil and the price caps. Too early in my view.
“It is clear that any deal behind our backs will not work. You need the Europeans, you need the Ukrainians,” EU diplomat, Kaja Kallas
Regardless of Trumps bluster, Zelensky nor the Germans are happy about not being at the negotiation table led by Trump. The realities of a mutually amicable peace deal within the year are doubtful. As one Ukrainian member of the DC trading team noted, this mirrors back to the 1938 Munich agreement- ceding the Sudetenland to Hitler, which was viewed as a betrayal to the people of Czechoslovakia, and ultimately led to the outbreak of WWII. Security assurances must be given to Ukraine first and to avoid repeating the mistakes, decisions will be taken slowly. There is an excellent podcast series on this from The Rest is History here.
"This war must end on Ukraine’s terms — anything less would be a betrayal of a brave ally who was invaded without provocation, and a direct threat to Europe’s security." David Reed-British lawmaker
Impact has been swift on prices in the past week. Seasonal spread traders have been rumbled by the reversal of buying that came in on the 6th/7th Feb. It is important to note that Trump is getting exactly what he wants- lower oil prices. Regardless of an indifferent OPEC+. Regardless of drillers not expanding operations, a peace deal in Ukraine would evaporate any risk premium left on oil. We are watching.
Price Narrative
Petroleum inventories in the advanced economies have depleted to the lowest level since 2022. OECD inventories were 136 million barrels (-5% or -1.01 standard deviations) below the prior ten-year seasonal average. This is where demand is at the lash of the ESG whip. I do mean to get around to writing up the fall of ESG funds soon. But please tread carefully there in ESG land. I put this to a panel of hedge fund managers talking about the morality of money at the Kilkenomics festival last year; they were confused to say the least that the snake oil of sustainable investments was falling apart. It is falling apart.
Global onshore crude inventories are LOW- Well below normal ranges. Coupled with low front month prices, this picture must change very soon. Dissonance between low prices and low inventories, speaks to a true imbalance that price is driven by the geopolitical. Supply is taking a back seat. Refiners are coming back to market prepping for driving season, yet the available feed-stocks are too low. IMO the price will snap up once political narrative of a near term peace deal fades. The market has priced in a peace deal done within the next 3 to 6 months. I don’t buy it. Money flows tend to sober all parties.
OPEC February monthly report highlights
The world economic growth forecasts remain unchanged at 3.1% for 2025 and 3.2% for 2026.
The global oil demand growth forecast for 2025 remains unchanged at 1.4 mb/d. The OECD is projected to grow by about 0.1 mb/d, y-o-y, while the non-OECD is forecast to grow by about 1.3 mb/d. This robust oil demand growth is expected to continue in 2026. Global oil demand for 2026 is forecast to grow by 1.4 mb/d, y-o-y, unchanged from last month’s assessment
China’s product imports marked a fresh record high, supported by refinery and petrochemical feed-stock demand.
IEA February monthly report highlights.
Global oil stocks in storage fell 63.5mb m-o-m in December.
Stocks of refined product rose 46.4mb
Demand growth this year has been revised marginally hitherto 1.1 mb/d
Chinese and Indian demand to dominate, with Chinese growth in petrochemical feed stock replacing the slide in transportation fuel demand.
World oil supply plunged 950 kb/d to 102.7 mb/d in January
Refinery runs dropped 1m bpd due to cold snaps and planned maintenance runs
BP Decline
Its seems that the pressure is mounting at BP since the departure of Bernard Looney - a local lad to these shores. The newsworthy event here is that its back in the news- which I suspect is a push for them to look to sell off blocks of the company over the next 2 years.
After ten years as a BP shareholder, I sold my position in late 2023. It became clear that the company's direction was problematic. While BP's dividends were acceptable, the share price suffered significantly after they, along with Shell, prematurely embraced a new ESG focus. Exon and Chevron growth romped on, while BP stood still, eventually topping out around $33’s. Shell, however, demonstrated more financial discipline in their carbon neutral project selections, carefully considering viability and the integrity of project leadership. Again, a wobble of attempting to overhaul a business to suit climate targets. This one cost the Norwergian soverign fund about $1.1Bln in their BP investment.
Chevron is to layoff 20% of workforce, prices were up on the open 1.46% settling at +0.76% for the day Friday.
Nat Gas trend to continue.
Ill just leave this chart here. Have a look at any Nat Gas futures contract or TTF contract (european gas) and you will see we are breaking out- the trend followers are present and flying their planes. I suspect the trend following CTA’s are in on this one.
Price
WTII OIL CLJ25
Price is balancing down on yearly vwap with average price on the year at $74. There is a fight for middle earth at YPVAL $70.59s which I have been tracking for a few reports now. Here we are again. Well staged fights in the market, are lost by the hopeful. And like any fight, we are best protected by stepping back. I had bought this area around the 7th Feb and enjoyed the brief 3 day rally. I am now fully hedged as we return to test. This is a keystone level for my edge. $70.59s. This is pretty much where we settled on Fridays pitt close. Whichever side of the tape that shows increased RVOL at this level will get my backing.
A retest on $70.59s is healthy for the auction process, with refiners requiring more and more stock at this time. Will the macro dynamics of a potential peace deal allow them to restock at much cheaper prices this coming week i.e down to $68s?- average price on the decade?
Presidents day holiday on the markets Monday. Expect volumes to be reduced on WTI.
These are not normal times for the oil market. So adjust your trade expectations to match. Its going to pay to wait for the next week to shakeout a bit more.
Keep it tight out there.
Tim
