No Love For Geopolitics In The Oil Pit

Summary

• Oil markets are in the grasp of the bear narrative.
• Positive crude storage report yesterday wasn't enough to release the bear grip, and don't even get us started with geopolitics.
• RBC notes that the rise of Mohammad Bin Salman increases the risk of more aggressive foreign policy.

Welcome to the no love edition of Oil Markets Daily!

Geopolitics are getting no love in the oil pits. The bear narrative around a possible oversupply in 2018 coupled with slower than expected crude storage draws are taking over the market sentiment. Despite geopolitical risks in the Middle East at 5-year highs, the market hasn't inched one bit on the latest headline risk from the turbulent region. Is the market that complacent?

In a report by RBC published today, the sellside bank goes to describe that the recent rise for Mohammad Bin Salman to Crown Prince should pose a higher risk premium for oil prices:

King Salman removed Mohammad bin Nayef and elevated his son Mohammad bin Salman (MBS) to Crown Prince. MBS’ rise has already brought change, and this will likely mean more hawkish foreign policy and intensified efforts to confront Iran. Under him, the Kingdom has entered a costly war in Yemen and has driven the surprise blockade of a fellow GCC member. There remain questions. What comes next to counter Iranian influence? Is the Qatar blockade an opening act in a broader anti-Iranian offensive? President Trump in the White House likely means that MBS will encounter minimal pushback from Washington and a far freer hand to police his neighborhood. We contend that the region could be subject to more volatility and heightened risk. The geopolitical risk premium may therefore be set for something of a comeback. At the same time, given the lack of any near-term resolution, we are raising the risk rating for Qatar in our OPEC Watch List from 2 to 5 given the ongoing conflict between it and its GCC neighbors.

RBC goes on to rank the geopolitical risk premiums in the following:

Source: RBC Capital

Even with elevated geopolitical risks in place, the market is undeterred and remains in the grasp of oil bears. Vocal oil bears in the beginning of 2017 have been spot on calling for a deterioration in sentiment and a drop in the price of oil.

Although oil bulls such as ourselves continue to point to the global oil storage rebalance, the market simply does not care right now, and the oil bulls like OPEC are having to fight through a tsunami of bad sentiment and bearish narrative.

Could a geopolitical event shake us out of this bearish grip?

Oil is an interesting commodity. It's like oxygen. When you have enough, you never think about it, but when you don't have enough, it's all you think about.

We don't know what catalyst is needed at the moment to shake us out of this bearish narrative. It could be several weeks of very bullish crude storage reports or it could be a geopolitical event shock or maybe even more headlines from Saudi signaling deeper production cuts. What we do know is that the bearish narrative is largely priced in.

The odds do not favor the bears right now despite the momentum and bearish narrative in place. Price is the only input needed to determine the risk to reward trade-off, and while the bears have been proven right going short over $50/bbl, going short at $42.50/bbl makes for bad risk taking.

We recently wrote a report for HFI Research subscribers called, "Let's talk facts about oil." In the report, we go over the factual data presented to us in the first half of 2017 and what we see happening. If you want more of our detailed oil market research, please sign up for HFI Research.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.