Oil Short-Sellers Might Be In For Another Big Squeeze

Oil prices recorded big declines on Thursday, with WTI and Brent crude down 3% on the intraday session as debt ceiling jitters overcame optimism about another round of OPEC+ production cuts.  

Rampant short-selling has also been putting a lot of pressure on the markets. According to commodity experts at Standard Chartered, speculative positioning in crude oil has now returned to its March bearish extreme despite the OPEC+ cuts taking effect in the current month. 

There’s a disconnect between what energy economists are seeing in the data and what speculative traders are acting on. Oil prices have touched multi-year lows on several occasions over the past two months, with StanChart speculating that the disconnect could be the result of the increasingly top-down and macro-led nature of oil-market sentiment.

But the shorts might be in for another big short squeeze. It’s becoming increasingly clear that Saudi Arabia is no longer interested in staying in Washington’s good books, and the OPEC+ cartel will do anything in its power to keep oil prices high.

Speculators, like in any market they are there to stay, I keep advising them that they will be ouching, they did ouch in April, I don’t have to show my cards I’m not a poker player… but I would just tell them watch out,” Saudi Energy Minister Abdulaziz bin Salman said on Wednesday as quoted by Reuters.

The United States and Europe have been strongly opposed to production cuts by the cartel, with President Joe Biden’s administration accusing Saudi Arabia of colluding with Russia and supporting its war in Ukraine shortly after OPEC+ announced the first cuts.

The Saudi Foreign Ministry can try to spin or deflect, but the facts are simple, this will increase Russian revenues and blunt the effectiveness of sanctions,” National Security Council spokesman John Kirby said in a strongly worded statement in October.

Shale Decline

The Biden administration has also been frustrated by the inability or unwillingness by domestic producers to ramp up production in a bid to lower fuel prices. U.S. shale producers have opted to return excess cash to shareholders instead of drilling more.

The much-touted second shale boom has lately been getting a reality check as equipment demand declines sharply, a worrying sign that drilling in U.S. shale energy regions is leveling off. 

The Financial Times has reported that next week, Texas auctioneer Kruse Asset Management will auction off two unused, top-of-the-line drilling rigs valued at $40 million and $30 million when built in 2019 at starting bids of just $12.9M and $2.3M, respectively.

There’s no reason for them to be so cheap, but there’s just no demand,” Dan Kruse, chief executive of Kruse Asset Management, has told the Financial Times.

According to Baker Hughes data, U.S. oil and natural gas rig count has declined 6% in the year-to-date to 731 last week, reversing a steady climb since the depths of the pandemic. The current tally is a far cry from the nearly 2,000 rigs that were running around mid-2014 at the peak of the shale boom. Last week, rig count for gas-directed rigs dropped by 16, or 10 per cent–the steepest weekly fall since 2016. Expectations for another shale boom are getting tamped down due to rising costs as well as limited supplies of labor and equipment that continue to hamstring efforts by U.S. shale producers to quickly ramp up production.

Still, a number of experts have predicted that U.S. production will continue growing. A week ago, the Energy Information Administration (EIA) forecast U.S. crude production will rise about 5% in 2023, while fuel demand will increase 1%.

U.S. crude oil exports for the month of April surpassed forecasts, hitting a record 4.5 million barrels per day in March thanks to a strong Chinese market due to rising fuel demand. U.S. crude exports grew 22% last year from 2021 after Russia’s invasion of Ukraine led the U.S., the EU and Canada to ban imports of Russian oil and dramatically altered global flows. 

China is the world’s second largest oil consumer, and has recorded an economic resurgence ever since it rolled back its strict zero-covid policies. April exports to China surged to ~850,000 barrels per day, the highest level since May 2020.

Overall, the oil price selloff is likely to prove fleeting, with most experts predicting oil prices above $80 a barrel over the coming years–well above the $58-a-barrel average price between 2015 and 2021.