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Page added on November 2, 2017

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In Today’s Oil Market, It’s America Last


America is, as you know, a bit different from the rest of the world. Lately, this exceptionalism has been more noticeable than usual in the oil market:

It isn’t just the outright price where a gap has opened up. The shape of the futures curves — how barrels for delivery down the road are being priced — for U.S. and international grades of crude oil are also striking different poses:

The discount for West Texas Intermediate, or WTI, blew out from about $4.50 a barrel to $6 in the run-up to and immediate aftermath of Hurricane Harvey in late August and early September. This made sense as disruption to refineries, pipelines and ports kept barrels trapped in the country.

But the spread had already doubled in the month before the storm hit Texas and Louisiana. And two months on, with the U.S. oil industry having largely recovered, it is wider still.

One likely explanation is speculative flows. Net length in Intercontinental Exchange Brent crude-oil futures and options held by money managers has jumped back above a notional 500 million barrels — in marked contrast to what’s happened with Nymex WTI. Notice that the disconnect here began to open up in early August, which is when the spread between the two prices first began opening up:

Analysts at JBC Energy, a research firm based in Austria, pointed out in a report published on Tuesday that money managers held 12.5 long positions in Brent futures for each short one, the highest ratio since late February. Again, such bullishness is markedly absent when it comes to the U.S. counterpart:

There are a few reasons why all the oil bulls are looking outside America. Some of the recent uptick in prices reflects the revival of geopolitical concerns, notably the stand-off between the Iraqi government and the country’s Kurdish population. And, of course, the so-called Vienna Group’s coordinated supply cuts are a purely international affair. Traditionally, Brent prices should reflect all this more quickly than WTI.

It may also reflect a logistical quirk. U.S. inventories of crude oil have declined sharply since late March; which, all else equal, should support prices and bullishness about further gains (less glut = more optimism). But stocks have been much more stable at Cushing, the pipeline-and-storage hub in Oklahoma that also serves as the physical delivery point for Nymex WTI futures, clouding the wider picture:

Cushing seems only a symptom of a wider issue, though, and that is the relative resilience of U.S. oil production. The latest monthly report from the Energy Information Administration, released Tuesday, shows that while U.S. output overall was down in August versus July, onshore production — which is driven by shale and other tight-oil basins — was actually up slightly and likely would have been more so if storms that month hadn’t dented the figures for Texas.

The monthly figures have been lower than the EIA’s less-accurate weekly estimates, offering some encouragement to bulls. And there are signs of a change in strategy for U.S. exploration and production firms, as investors press them to prioritize cash flow and returns over outright supply growth.

Even so, there are indications that supply from U.S. shale basins isn’t necessarily about to hit a wall. For example, having reported quarterly results on Monday evening, Noble Energy Inc.’s management reaffirmed oil production targets for its U.S. onshore business, highlighting continued efficiency gains there. Noble told investors on Tuesday morning that footage drilled per rig, per day in the Delaware area of the Permian basin had jumped 30 percent compared to the first half of the year. Noble also said it hasn’t seen much sign of the long-anticipated return of cost-inflation, echoing points made earlier this month by ConocoPhillips and Halliburton Co.

Meanwhile, the increase in WTI futures back above the important level of $50 a barrel appears to have sparked more hedging by E&P firms, putting in a foundation for production growth next year.

A more complete picture on U.S. producers’ intentions will emerge as earnings season progresses.

For now, with optimism in Brent contracts back to levels last seen in February, the big question is whether or not this portends another drop as bullishness fades, as it did back then. This time, a combination of geopolitical rumblings and the prospect of another OPEC meeting in a month’s time could keep managed money onside.

Ultimately, though, it’s difficult to see how the market can price in tight supply overseas simultaneously with loose conditions in the U.S. for very long. If speculators’ instincts in Brent are to prove correct, some of that enthusiasm will have to show up stateside.


5 Comments on "In Today’s Oil Market, It’s America Last"

  1. Anonymous on Thu, 2nd Nov 2017 9:15 am 

    If you want to understand US to World prices it is better to look at the Brent to LLS spread or the Brent to WTI-Houston. (Both spreads are easily tracked, for free, on the CME site.) Right now more than half of the $6 spread is Gulf oil (LLS or WTI-Houston) to Brent. The other half is WTI-Cushing to the Gulf (LLS or WTI-Houston).

    Here is one link, you can find others:

    What causes this? Has not been well covered but in the past (e.g. 2012) same issue occurred and had to do with pipelines that were inadequate for southbound flows from Cushing. Significant additions of pipe were made in the past to alleviate this problem (as of late 13 and 14). But with DAPL now adding 0.5 million bpd into the Midconn, there is not enough pipe to equalize prices at the Gulf and Cushing. DAPL does not terminate at Cushing, but in south IL, but still impacts Cushing as it is close and serves refineries that would get Cushing barrels (that now want to flow south but can’t.)

    There is still a large spread between Gulf oil prices and Brent but not as big as the spread within the US. Anything much over 2-3 bucks is not sustainable for a spread from the Gulf to Brent because exports are not ba…restricted as previous. You can get on a boat and go anywhere for much over two to three bucks differential. Which prevents much over that happening. And of course we are seeing huge exports from the US at this time (two million bpd is nothing to sneeze at). Note that this does not mean we are Saudi Arabia. The exports of light crude from the Gulf are balanced by imports of heavy crude to the Gulf (or Brent to East Coast refineries no longer getting Bakken crude trains because the barrels are going to DAPL now).

  2. rockman on Thu, 2nd Nov 2017 10:11 am 

    “…how barrels for delivery down the road are being priced…” Just a small correction: 99%+ of the “oil” traded on the Nymex IS NOT “oil” destined for delivery. They are “paper bbls” that actually don’t exist.

    The Nymex is essentially a betting room not much different then a casino in Vegas. Nearly every contract is bought as a bet on the future contract prices. Thus it isn’t really even a bet on what the price of physical oil is selling for when the contract matures but what new contracts are selling for at that time.

    The futures market prices constitute A PORTION of the calculation used by the Rockman’s oil buyers. But the physical oil I sold in Oct used the futures prices July or August depending on the sales agreement. IOW it has nothing to do with the Oct futures prices.

  3. Anonymous on Thu, 2nd Nov 2017 10:18 am 

    You’d be better off if you had sold at OCT spot than that sales contract. 😉

    Of course the opposite could have happened too. The price, she drops, she rises.

  4. dave thompson on Thu, 2nd Nov 2017 4:05 pm 

    By my un-professional estimate, we are long overdue for another world-wide price spike in crude oil,that will send the economic system into another tailspin, leading to a crash that will make the “great depression” of the 1929 type look like child’s play.

  5. makati1 on Thu, 2nd Nov 2017 6:50 pm 

    dave, your prognostication is spot on. The next spike will be the one thru the US financial heart. No recovery, just a slow death.

    So many oily people will be out of a job and career when that happens. Brokers, bankers and economists will also be in the bread lines with the common folk. Couldn’t happen to a nicer bunch of guys. LOL

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