• GB Davis

Oil has a Bid - 5/23/20

We recap some of the comments we've made on oil; and note that OPEC is around the corner here. 


On March 27, 2020, in "Week Ahead," we indicated, Venezuela, U.S.: Washington Indicts Maduro, Plans to Designate Country as State Sponsor of Terrorism.  What Happened: The U.S. government has indicted Venezuelan President Nicolas Maduro and more than several other top Venezuelan officials on charges of "narco-terrorism," Reuters reported March 26. The U.S. State Department also announced that it's planning to designate Venezuela as a state sponsor of terrorism.  Why It Matters: Collectively, the two moves dramatically ramp up pressure against Maduro and his regime. The designation of Venezuela as a state sponsor of terrorism, in particular, is likely a prelude to the United States declining to extend sanctions waivers for Chevron and other Western oil companies still operating in the country when the current waivers expire on April 22. Background: The United States is offering a $15 million reward for information leading to Maduro's arrest or conviction, and offering a $10 million for some of his associates, as part of the White House's ongoing push to oust the Venezuelan leader. (Stratfor).  Venezuelan President Nicolás Maduro warns Washington he is ready to fight by whatever means necessary (AP).   The timing of this move by the U.S. coinciding with (a) the country now outpacing all other countries (e.g. China, Italy) in terms of COVID-19 cases, where the trajectory slope is still upward and positive; (b) credit stress in the domestic and global markets; and, (c) all-time highs in unemployment claims this week, and an expected continuation of this pattern for weeks to come as the U.S. and world economies are now clearly in recession - is not, necessarily, coincidence in the least.  Unfortunately, war spurns economic growth, and a conquering and/or liberation of Venezuela will be more tolerated than direct conflict with most any other nation on the globe at this point in time.  The arrest bounties are notable.  Clearly the U.S. has upped the ante to overthrow the existing Venezuelan regime. (HFin) 

On March 28, 2020, in "The Curious Case of Botswana," we indicated, in part, " We expect certain commodity currencies, especially oil exporters, to get wrecked this coming week and a reversal in the USD which started to lighten this past week after considerable strength - however, currencies are not our strength." 


On April 8, 2020, in "Catch and Release," we indicated, "Normally, our view in such situation is that Europe may lead the way here, but the sell off intraday yesterday was so hard and so fast (largest one-day intraday move since 2008 and TARP announcement) coupled w/ the bid this AM in oil, and stable (but relatively high, but lower high) volatility, means we could tread water (our view on the open) - if we lose oil today, like yesterday, we will likely see commodity selling pressure followed by equity pressure. Our view is that there is no OPEC agreement (an agreement to agree at a later date, with larger buy-in, just as more parties have been invited than OPEC itself), and then oil sells off tomorrow - if it bleeds early (e.g. today, today end of session), then we will lean in risk off and are monitoring somewhere between 100-200 issues currently for entries (long and short)."

On April 9, 2020, in "Short Week," we indicated, "Certainly, today's OPEC is front and center - with likely no agreement in our view, but an agreement to agree at a later date (i.e. yes, we should stabilize the market via cuts, in a coordinated capacity, but now need global input beyond OPEC).  Then we will see this spill into the G20 tomorrow, which has announced its own oil stabilization "group" - these things take time and until then, the pumping continues.  So, we will see progress, but not agreement and stabilization (more than likely).  We take the Goldman view that oil barons and sheiks will place a $30/bbl target (this seemed to be the same via as the CIA as well) and compute everyone's pro rata supply cuts needed - in the interim, in a market sell-off, could oil trade to $20 or under, certainly."

On April 9, 2020, in "On Pure Genius - David Ogilvy of Ogilvy & Mather," we indicated, "As we mentioned yesterday, Oil was Faded after OPEC failed to reach a deal, but made progress with the petro-buck passed to the G20, today"

On April 12, 2020, in "Mexico Extracts a Pound of Flesh," we indicated, "we expect some oil volatility while headlines clash.  A few comments and thoughts: First, the Mexican government, which itself collects an estimated 80-100% of PEMEX's EBITDA at present, hedges in the oil market.  Their current hedge is estimated to be in the money by around $5 billion - so in reality, our back of the envelope estimate puts this hedge at ~$2.5 billion if oil were to rise to ~$30/bbl (we don't actually have the details on their hedge).  Goldman has a $30/bbl target.  Fitch, which downgraded PEMEX on 4/3/20 (Fitch Downgrades PEMEX's IDRs to 'BB'; Outlook Negative Fri 03 Apr, 2020 - 3:52 PM ET, good report btw, read it), has a $32/bbl estimate, rising to $42 in '21 and $52 over the "L/T".  In the grand scheme, $2.5 billion, while a lot to the Mexican Government, is not a lot to the oil market; and, one some other equivalent is extracted somewhere, OPEC and Co. will either move on, or Mexico will cut - we don't foresee such taking too much time, no more than a month in our estimate (which is really just a guess at this point).  At that point, we should see a tighter oil range in the $28 to $32/bbl range (in our opinion) for much of the balance of the year."

On April 19, 2020, in "Not a Whole Lot Going on Candidly," we indicated, "Oil? We don't care much about oil until the June OPEC"


On April 20, 2020, in "Andrew Dickison White, "Fiat Money Inflation in France"," we indicated, "Oil grinds lower and lower yet with a supply glut and the failings of a global coordinated supply cut; or when initially perceived as sufficient to stabilize the price of oil (est. 20M bbl, we're no where close to that yet and may not be in June either) - there are deflationary pressures"


On April 21, 2020, in "Spectacular Oil Gyrations," we commented, "We are long oil from late yesterday because we think oil actually has value and is historically cheap here.  We will most likely hold (not to be confused with build) until sometime between June and October."

On May 2, 2020, in "Lock, Stock and a Loaded Chamber," we commented, "Remember in recent weeks when we said that oil was likely to remain in the $20 level? and migrate towards a global $30bbl target later this year?  WTI closed at just under $20 on Friday"

On May10, 2020, in "Odds and Ends, Week Ahead", we indicated, "We are watching OIL, now firmly above $20 - as we SAID IT WOULD - when PANIC hit the world but a mere few weeks ago.  Our view, now, is that oil should be range bound in the $25-$35 range, with $30 as the unofficial OPEC/G20 level - however, such is dependent on coordinated follow-through in June and cuts by 20m bbl off of early 1Q20 levels to reach a supply-demand balance.  IF oil trades into the $40-$45 range, then it's highly probable that a recovery is for real and timely square front-and-center."


NOW:


Tankers in the Caribbean. The United States is heading for a showdown with Iran and Venezuela in the Caribbean next week, with the first of five Iranian tankers carrying gasoline to Venezuela possibly entering Venezuelan waters as early as the weekend. The United States has been looking at several options to prevent the tankers from reaching their destination including legal options and possibly even seizure. Any physical U.S. attempt to interdict the shipments could escalate to another crisis point in the Persian Gulf, as Iran might target U.S. ships in the Gulf in response — just as it targeted a British tanker in the Gulf last year following the British seizure of an Iranian tanker off the coast of Gibraltar  (Stratfor)  AT THE SAME TIME, however, the U.S. NAVY Carriers, Truman (75) and Ford (78) and are indicated near port (but out to sea) in Hampton Roads; and, the USS Essex (LHD 2), is in the Pacific Ocean off the coast of Guatemala.  Therefore, despite Maduro being somewhat recently named a Terrorist by the U.S. and that farcical alleged Silvercorp U.S. Military Coup towards Venezuela earlier this month - let's be honest, this is merely for fact finding and information purposes, we believe that the tankers will have safe passage into Venezuela.  HOWEVER, should this become a more common trade route, it is something to monitor.


For now, oil has a bid, and the JUNE OPEC is just around the corner on June 9-10 - and this is not a runaway bid, mind you - but generally lines up with what we have laid on the topic over the past two months



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