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April 29, 2018

Market overview – Oil, CFTC data and US stock market

Market overview – Oil, CFTC data and US stock market

United States will probably outpace all its rivals on the oil market in terms of export growth next year, forecasts Citigroup.


Amid robust output increase in the United States to unprecedented levels and considering production caps imposed inside OPEC members, the US will probably become the world’s largest exporter of black gold, Citigroup believes.

According to the US Department of Energy, last week US oil exports rose to the new record highs of 8.3 million barrels per day. At the same time Saudi Arabia has been exporting 9.3 million barrels and Russia 7.4 million barrels, calculated in the bank.





OPEC and its allies managed to overcome the gloom relation to global oversupply and prop up prices. WTI closed to its long-term peaks, which undoubtedly spurs shale oil production which costs of drilling stays at roughly $40 per barrel. 

The United States masterfully took advantage of the OPEC+ deal and began to enter the market in time, meeting new demand. However, if you look at the financial reports of US shale companies, then there is not all that smooth – the companies have a fairly high level of leverage and bad assets, many of which have already been devalued several times. So now they use the price increase to clean their balances, but most likely, they will not be able to survive the second turmoil on the market.


For almost two months, hedge funds has been slow to make any significant changes in their oil positions.


According to the CFTC data, the funds held 468,600 long and 35,500 short positions in their portfolios in the week ending on April 24, which is 6.9 thousand fewer and 2,4 thousand more comparing to the previous week. Thus, their net “long” shrunk to 433.1 thousand contracts.

Hedge fund positions have been fluctuating for almost two months in this range. That is, their reaction to market events remains muted – a kind of wait-and-see position.

As for the largest four traders on the New York Mercantile Exchange, they seem to have decided on their actions – the spread between “Long” and “Short” began to increase in favor of the second. By Tuesday, the difference reached 4.8 percentage points. Since last week it has grown by 0.3 percentage points.





Recall that at the time of U-turn in oil prices in early 2016, the spread in favor of long positions reached 7.2 percentage points. It turns out that these levels do not reach 2.8 points, but today there is not such a strong trend, as it was two years ago.

Currently there are fears that a nuclear deal with Iran will be disrupted, which could lead to the withdrawal of its oil from the market. Last year, Tehran exported about 2.1 million barrels per day. But during the period of sanctions, the Islamic Republic sent to the international markets an average of 1.4 million barrels. The difference of 600 thousand barrels under current conditions is easily replaced.

In addition, since Iran fulfills its obligations, and the United States is the initiator of the termination, it is most likely that the UN embargo will be avoided. Therefore, if the growth of prices occurs, then, in our opinion, it will have a short-term effect. What can shake prices, is the slowdown of the world economy and “trade wars”.


In the US debt market, changes are projected – trade turnover with bonds has grown significantly this year.


The average daily turnover of debt securities on US exchanges in 2018 increased to $857.6 billion, which in turn is 12% more than in 2017. In addition, the last time bonds were so actively traded in 2010. However, is still far enough from the past record – in 2008, the average daily turnover was 1 trillion dollars.

Trading volumes of US government bonds have also increased- an increase over the last year averaged $68 billion. Thus, an absolute record was set for trading volumes.

The demand for short-term US government bills has also increased noticeably. It exceeded the supply by 3.4 times at the auction held on April 22, . With the issue of Treasuries of $26 billion, investors were ready to buy paper for $88.3 billion. There was no such rush around the issue since the summer of 2015.




Conventional wisdom suggests that in times of turbulence and uncertainty, investors should opt for short securities.

Debt markets react to the trend change a little earlier than the stock market. The growth of trade turnover can be an indirect signal of a changing situation. This activity was not observed even in 2015 and 2016, when the stock indices were a step away from the collapse.

On the other hand, we can say that during this time, the volume of issued securities increased, so the growth of trade turnover is a natural thing. But at the same time, we should not forget that since 2008, the US debt has more than doubled, and the volume of operations remained at about the same level.

Therefore, in our opinion, a kind of “tectonic shifts” take place in the United States debt market. It’s not good, it’s only the beginning.


The level of leverage in the US stock market is near its historical highs, calculated in FINRA.


In January, at the time of euphoria on US stock exchanges, the amount of debt of private and institutional investors to their brokers reached $665.7 billion, which is the absolute maximum in the history.

In February, amid correction movement, the level of leverage also decreased – its amount fell by $20.7 billion to $ 645.1 billion. In March, it remained virtually unchanged – $645.2 billion, but it is still very close to record levels.




Investors sometimes underestimate the danger of borrowed funds, as with rising prices it tends to yield higher profit but during the fall on the contrary – it magnifies losses. But at the same time, when the markets go against the investor’s position, there is a danger of a “margin call”, when the broker forcefully closes the positions of his client in order to secure his funds. In times of slump in the stock markets, it is these actions that lead to an even greater collapse.

The other day, the US stock markets tested the most important support levels – the 200-day average. Traditionally in the US, it is perceived as an indicator of the state of markets. If the prices fall below it, then this translates the indices into a bearish zone and vice versa.

If the markets still go below the 200-day average, this can cause an emotional reaction and a slight panic, which will primarily lead to the closure of debt positions. Therefore, it is the borrowed funds that can provoke the collapse of stock exchanges.

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