Exploring Hydrocarbon Depletion
Page added on February 4, 2017
Oil traded in a painfully dull range yet again this week through Thursday ($54.34 / $52.24) after managing just a $4.53 range in January ($55.24 / $50.71.) The market remains caught between preliminary OPEC data which revealed significant production cuts from six members and Russia in January and poor US data which continues to show way too much gasoline in the mid-Atlantic, too much oil in the USGC and demand that simply isn’t good enough. Bloomberg estimated that total OPEC production declined by 840k bpd between December and January lead by cuts of 500k bpd from the Saudis, 160k bpd from the UAE, 150k bpd from Kuwait, 120k bpd from Iraq and 70k bpd from both Algeria and Venezuela. The six members cut production by a total of 1.07m bpd which reveals a strong commitment to their deal but the progress was offset by output gains of 140k bpd in Nigeria, 70k bpd in Iran and 60k bpd in Libya. Away from OPEC Russia’s energy minister stated that the country cut 117k bpd of production in January and is on their way to reducing output by a total of 300k bpd.
– Looking forward, we still expect OPEC + Russia’s tightening efforts to push the flat price into a $56-$61 range and see evidence of a tightening market in overseas refined product stocks and prompt spreads in both WTI and Brent. In the near term, however, the massive overhang of US crude and products and comeback of US shale persist as formidable barriers to a rally. Recent data shows mid Atlantic gasoline inventories at a record high of 39.7m bbls, PADD III crude stocks are +10.5% y/y and within shouting distance of a record high and the US rig count’s jump to a 15-month high has increased US output by more than 500k bpd since its low in July. US drillers are exacerbating strong gains in Brazil and Canada who have combined to increase output by about 700k bpd since July.
– On a more bullish note, oil got some noticeable support from currencies this week as the Trump administration decried the strong USD and Wednesday’s Fed comments were interpreted as dovish. While EUR/USD and WTI have had basically zero statistical correlation in recent months there appeared to be some short-term help from FX as the US Dollar Index sank to a 2.5 month low. Fed fund futures imply that the central bank will keep overnight rate steady until the summer with 70% odds of a hike coming from the June 14th meeting
OPEC keeps cutting, spreads keep rallying
Prompt WTI spreads corrected sharply lower on Monday due to Seaway/Legacy issues which should be solved next week. WTI H17/M17 reached a weekly low of -1.76 on Tuesday but recovered to -1.53 on Thursday and is comfortably still in a bullish trend having rallied from -2.21 on January 10th. In the 2nd half of 2017 M17/Z17 strengthened to -0.72 on Thursday yielding just 12 cents of contango per month and forecasting significant stock draws later this year. In the near term, however, elevated stock levels in PADD III (+11% y/y,) Cushing and floating storage in the USGC weigh on WTI.
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In diff markets WTI-Brent continued its bearish trend this week with the M17 contract moving below -2.00 for the first time since 2015. The arb has lost more than $1 since the OPEC deal was announced and more than 40 cents in the last two weeks as OPEC cuts have made US fundamentals comparitvely weak. WTI has outperformed Midland in the last two weeks, however, with Midland-WTI falling to 0.50 on Thursday.
US crude production data was mixed for the past week with its most bullish input coming from a 50k w/w decline in output to 8.92m bpd. Through a more bearish lens this number is still 490k bpd higher than its 2016-low at 8.43m bpd. Next up, the rig count continued its relentless climb last week and at 566 is at its highest point since October 2015 on a 79% rally since May. As for trading flows the most recent round of COT data showed little activity w/w with producers and merchants maintaining a gross short of 677k contracts. Related: Oil Prices Up On Prospect Of New Iranian Sanctions
Prompt Brent spreads jumped higher this week with help from OPEC cuts which reduced Saudi output below 10m bpd for the first time in nearly two years. The kingdom has decreased output by nearly 700k bpd from its peak at 10.66m bpd in July. The effort helped Brent J17/M17 jump to a peak of -0.51 on Thursday for a 2-month high and has rallied more than 50 cents in the last three weeks. DFLs also continue to suggest strength in the brent mark by holding recent gains near -0.80.
Volatility still sideways near 30%
Crude oil options finished the month of January in unremarkable fashion and began February similarly. After sticking near 30% for the last month WTI H17 at-the-money vol was near 30% Thursday morning while the skew of course remained virtually unchanged. 25 delta puts traded near 33% on Thursday morning for a 4-vol premium to 25 delta calls at 29%. The painfully narrow range in flat price also resulted in 20-day realized volatility sinking to 27%.
Funds stay long with COT flows mostly flat w/w
Hedge funds were small buyers of NYMEX WTI and small sellers of ICE Brent last week. In WTI, fund net length increased from 350k to 370k and is hugher by 65k contracts over the last two weeks due to the previous week’s large increase in length. Brent net length was cut by 14k contracts to 448k and is basically unchanged over the last eight weeks. Funds continue to show little interest in building aggressive short positions on oil with gross shorts for NYMEX WTI at 51k contracts and gross shorts for ICE Brent at 42k contracts. Gross long positions for WTI currently outnumber gross shorts by 8:1, and the same ratio for Brent is at roughly 12:1.
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Refined product flows were also basically flat in the most recent round of COT data with funds holding a net long position in NYMEX RBOB of 62k contracts while net length in NYMEX Heating Oil stayed just below 35k. There was some real action, however, in ETF flows as investors pulled $166 million from the USO for the week ended January 27th. Net flows since November 26th have total -$929 million.
East Coast gasoline leads another bearish set of EIA stats
• Wednesday’s stat report was more bearish than expected with a 6.5m bbl build in crude oil stocks, a 3.9m bbl build in gasoline stocks and a 1.6m bbl build in distillates
• The most bearish component of the data was a 3m bbl build in PADD IB gasoline stocks which brought inventories in the mid Atlantic to an all-time high
• Falling exports and increased imports drove an 8.4m bbl crude oil build in PADD III
US crude oil supplies jumped by 6.5m bbls w/w and are higher y/y by 5% over the last four weeks. PADD II inventories are higher y/y by 3% following a 50k bbl w/w build while PADD III stocks are higher y/y by 11% after an 8.4m bbl build. Much of the PADD III build was due to a 754k bpd w/w increase in imports (+14% y/y) while exports fell 50k bpd to 549k bpd. On a more positive note, inventories in the Cushing delivery hub fell by more than 1m bbls and are 4.4m bbls off of their recent peak in late December.
On the demand side refiner inputs fell in line with seasonal expectations while crack margins moved slightly lower. Overall US refiner demand fell by 100k bpd to 15.95m bpd and is higher y/y by 2.7% over the last month while utilization at 88.2% is higher y/y by 1.3%. The WTI 321 crack dipped slightly below $14/bbl on Thursday while RBOB/Brent moved below $9/bbl. Overseas, gasoil/brent was in line with seasonal norms near $11/bbl. Related: Top 10 Bankruptcies Of 2016 Feature 9 Energy Firms
In product markets gasoline data was more bearish than expected lead by a 3m bbl gasoline build in PADD IB. Mid Atlantic gasoline inventories reached a record high last week at more than 39m bbls and are higher y/y by nearly 9%. Overall gasoline stocks are higher y/y by 1% on a w/w build of 3.9m bbls. On the demand side domestic consumption jumped to 8.3m bpd and is flat y/y over the last month. Exports at at 900k bpd are higher y/y by nearly 100%.
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RBOB futures made a weekly low just below $1.50/gl on Monday and rallied to a peak of $1.59/gl on Thursday morning. Unfortunately gasoline weaked considerably later in the day and settled near $1.54/gl which was basically flat on the week. Spread markets maintained their bullish trend early in the week with M17/Z17 touching an 8-month high above +26 cents. The gains moderated late in the day Thursday but the bullish trend endures.
US distillate inventories also jumped by more than expected and the 1.6m bbl increase put inventories higher y/y by 7%. The build was entirely due to a 1.59m bbl build in the already oversupplied PADD IB where inventories are higher y/y by 14%. PADD II distillate stocks are higher y/y by 3% while PADD III stocks are higher y/y by 9%. Domestic demand at 3.8m bpd is higher y/y by 8% while exports at 880k bpd are lower y/y by 28%.
Heating oil futures continued to move sideways this week near the $1.65/gl – $1.70/gl area. Like RBOB, HO spreads enjoyed a bullish run with M17/Z17 printing -4.75 on Thursday for a 1.5 cent rally in the last three weeks.
Overseas, gasoil spreads were also bullish with M17/Z17 moving to -7.00 for its highest print since June 2015. Gasoil inventories in the Amsterdam-Rotterdam-Antwerp hub declined slightly w/w and are lower y/y by 8.5% over the last four weeks. Further east, distillate inventories in Singapore increased by about 800k bbls w/w and are roughly flat y/y.
By SCS Commodities Corp.