Oil Erases Entire OPEC Cut Rally: “And Like That, It’s Gone”

Well goddammit I told you so.

I don’t how many times I’ve said that oil will almost invariably head lower (and maybe sharply lower) once everyone gets sick and tired of waiting around for something that, to be brutally honest with you, isn’t f*cking coming.

The whole production cut agreement was a farce from the get-go because you can’t really call something a “cut” when you ramped up production going into it. That is, if the baseline from which you’re cutting is elevated relative to recent history, well then you aren’t really “cutting”, are you? Here’s a visual reminder of what the setup was:

(Bloomberg)

So ironically, the cuts will probably need to be extended just to make up for the pre-cut production ramp. Throw in the upsurge in US activity and resultant record high US stockpiles…

…and you’ve got yourself the recipe for a deflationary supply glut and attendant plunge in prices. Sure enough, crude collapsed on Wednesday as the reality of the latest API/EIA numbers kicked in.

Fast forward to Thursday aaaand…. it’s gone. It’s all gone. The entire post-OPEC-cut gain has evaporated… 

Cue Keyser Söze..

You might remember what I said on Wednesday afternoon. To wit:

“The catalysts that we expected from changes in inventory levels have not played out as we expected,” one energy sales specialist said. “The market needs several catalysts to move the space higher.”

I see. Kind of seems like maybe all those longs are liquidating…

Sure enough…

“We’ve been seeing long positions on record levels, so many people bet on rising prices, which didn’t occur,” Gerrit Zambo, a trader at BayernLB told Bloomberg by phone. “The production-cuts story also isn’t biting.” 

No Gerrit, it sure isn’t.

So, coming full circle, this is when I get to say “I told you so” and ask that you politely recall the following which you hopefully read here two weeks ago…

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Here’s that punchline, courtesy of Bloomberg:

OPEC and its partners probably need to prolong production cuts simply to counteract the glut they created just prior to the deal, according to Citigroup Inc.

The Organization of Petroleum Exporting Countries and allies including Russia don’t need to cut output much further to rebalance world markets, Citigroup’s Ed Morse said. However, they’ll likely need to keep output low once the accord expires in June in order to clear supplies added while negotiating the deal last year, he said. Producers will decide in May whether to prolong their agreement.

“The OPEC cut ironically added a million barrels a day of oil to the market” because producers ramped up before the deal took effect, Morse said in a Bloomberg television interview with Francine Lacqua and Tom Keene. “One of the ironic aspects of that two-month period when they all over-produced is that” it means the supply deal “probably needs to be extended.”

If that sounds familiar, it’s because either it’s common sense or because you heard me say it earlier this week. Here’s the specific Heisenberg quote from Tuesday:

Along these same lines, it’s worth noting that when we talk about OPEC cuts, it’s not exactly like they were cutting from suppressed levels of production.

So what this means is that if OPEC doesn’t extend the deal — which I contend that they may not, depending on how the Saudis are feeling about the debt market (i.e. if investors are still as starving for Riyadh’s debt as they apparently were in October when the kingdom’s $17.5 billion offer was hugely oversubscribed), the Aramco IPO, and Tehran’s ability to fund the three Sunni/Shiite proxy wars raging in Syria, Yemen, and Iraq — then what you effectively got with the production “cuts” was a production “hike.” 

Add that to record US inventories for both crude and gasoline and you’ve got yourself a full retard dynamic. And as always, you…