(WCTW) An Important Update On The Oil Market Following The Latest Geopolitical Developments
The oil market moves fast. If you went to sleep on June 12 and woke up 11 days later, you wouldn't have noticed anything different in the oil price ($67 vs $68). Yet for the market participants who were paying close attention to the geopolitical developments over the last 10 days, you would have thought the world was ending.
But as we wrote in last week's WCTW, "A Sobering Look At The Oil Market Amidst The Geopolitical Chaos." We said:
Geopolitical tensions between Israel and Iran are at an all-time high, but I come bearing advice for those of you who want to stay sane amidst the chaos in the oil market:
Avoid listening to geopolitical experts.
Avoid listening to those who say Iran will close the Strait of Hormuz.
Avoid the sensationalism that's developing on both sides (Israel and Iran).
Instead, do this:
Focus on the signals: oil facilities (Kharg Island), production facilities/oilfields, and Iranian crude exports.
Global oil supply & demand balances.
Physical market indicators (timespreads & refining margins).
OPEC+ policy response.
It's easy to get carried away when there's a lot of media hype. My job in this article is to realign your focus on the things that matter.
If you took our advice and avoided all of the distractions, you should have navigated the massive drop in oil well today. Since the turmoil started on June 12, we have reduced a significant portion of the energy portfolio.
In terms of exposure, we are net short 12.98%. Our XLE short position outweighs our long positions. Suncor, currently our largest oil producer long, will be well insulated in the event oil prices pull back further. As for the current cash holdings, we will wait for opportunistic names like Sable Offshore and New Stratus's catalysts to develop.
In this piece today, I will cover the following:
Our latest view on US crude oil production and where it's headed.
The impact on global oil inventory balances by year-end.
Signals.
What I will not spend time on is the latest geopolitical developments. Enough brain cells have been wasted on trying to figure out what Iran, US, or Israel will do next. Instead, readers should remain focused on the fundamentals and signals.
Our Latest View On US Crude Oil Production
Remember that in last week's WCTW, we wrote:
In essence, anything below $65/bbl WTI and we will push for a steeper deficit, while anything above $65/bbl WTI will increase the surplus. That's the balancing point to understand the incoming trajectory of global oil inventories, and frankly, the longer WTI stays here, the more opportunities it will give US shale producers to hedge, which will prevent the possibility of even lower production down the road.
Geopolitical risk premiums are not always a good thing in the long run.
Well, here's the problem. US shale producers were able to use some of the price spike last week to start hedging H2 2025 production. How much?