Energy futures are ticking cautiously higher to start the week with headlines split between a short term catastrophe and a potential game changer for long term oil supplies.
An Iranian oil tanker collided with a cargo ship off the coast of China, sparking a huge fire and threatens to be the worst tanker spill in 30 years. While tragic in terms of lives lost and potential environmental damage, the situation does not seem to have stirred prices so far and may be seen as an isolated incident rather than one that might influence global shipping patterns.
Last week, the Interior Department announced a proposed plan to open up US coastal waters to oil and gas leasing, which is reportedly the most aggressive offshore drilling plan in history. The opposition to this plan from several states has already started, and it would take years before any of these projects begin. This proposal, if passed, will provide some interesting insight into the long term views of big oil however to see if they’re ready to again start investing in the longer-cycle plays with WTI at $60.
Speculators are still eager to bet on higher energy prices with Brent and ULSD reaching new records for managed-money net-long positions last week. WTI saw a modest decline, but remains near its own record high for speculative length. The Swap dealer category of trader reached another record net short position last week, suggesting that producers are happy to sell into the oil rally to hedge future production. Since producers often don’t want to tie up their capital with the margin required to trade futures contracts, they often use the Swap dealers as intermediaries to execute their hedge programs.
Baker Hughes reported a decline of 5 oil rigs last week, ending 2017 with 26 fewer rigs than where the count peaked out in the summer. On the other hand, the total is still 121 rigs above where it stood a year ago. The record net-short position held by Swap dealers suggests that US producers have been hedging future output at a record pace and may keep the rig count moving higher in 2018.