Following his bearish note last week, Morgan Stanley’s oil analyst Adam Longson is out with a new report, in which he accurately explains that the recent oil-price jump is driven by traders covering bearish bets, even as market fundamentals are seen remaining weak in coming months.
According to Longson, a ‘sizeable’ amount of Sept. WTI put positions at $40, $45 recently came into or near the money, leading to spike in hedging by traders to cover their exposure. However, the good news for oil bears is that the effect of this action will fade once option expires Aug. 17. As we have pointed out previously, the recent comments from OPEC, and IEA helped reverse bearishness and also unleash the recent short squeeze which led to the biggest weekly jump in oil in 4 months.
He then notes that he ‘would not be surprised to see tank top fears return in 1Q17′ as he sees rising U. S. crude inventories in coming months.
He list other bearish factors for oil, which include modest implied draw in global oil stockpiles in 3Q, as well as a lack of meaningful cuts to refinery run rates. A record OPEC production, albeit seasonal, with potentially higher Libyan exports and Iraqi output growth into 2017 add to bearish indicators.
He notes that the draw in U. S. gasoline inventory seen deceptive as higher net exports – lower imports and more overseas shipments – could be ‘masking the problem.’ He concludes that if global product markets remain oversupplied, ability to export on larger scale may be limited and run cuts unavoidable.
This post was published at Zero Hedge on Aug 15, 2016.
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