From SCS OTC Corp: WTI traded in a $52.11 – $55.25 range this week driven by sharp moves in currencies, updates related to good and bad behavior on production cuts from OPEC and non OPEC exporters and a poor EIA report.
On the bearish side the US Dollar index’s highest print since December 2002 and Iraqi PM al-Abadi’s assertion that their Kurdish region was already violating its export limit agreement put downward pressure on oil early in the week. (Reuters later reported that Iraq has cut production by 200k bpd which is in line with the OPEC agreement.) Libya also added to the negative news by reopening the last of its conflict-shuttered export terminals which- according to Platts- had capacity of up to 230k bpd in 2013. More bullishly, Bloomberg reported Thursday that Saudi Arabia has been fully complicit with its production cuts by reducing output by 486k bpd to 10.06m bpd.
Going forward, we expect that a strong US Dollar and OPEC infighting will continue to apply bearish pressure to the market. However, we also believe that already-improving fundamentals in addition to even modest production cuts will generously support prompt spreads and flat price. Therefore, we are abandoning our $47-$55 forecast for WTI held since October with a more positive view that crude will move into a $55-$61 range in the coming months.
This week’s DOE report also added pressure to the market with massive inventory builds in gasoline and distillates in addition to a crude oil build in Cushing of more than 1m bbls which brought stocks in the hub to an eight-month high at 67.5m bbls. The only semi-bright spots of the report were a 7m bbl draw in PADD III which was almost entirely due to an import slowdown and a decent increase in refinery inputs.
Away from the oil market, the US Fed released minutes from its December meeting this week which revealed optimism on the ability of the economy to reach employment and inflation targets in 2017. Fed fund futures suggest that the FOMC’s next rate hike will occur in June. The minutes were adequately dovish for the US 2yr yield’s selloff to continue for a third straight week; perhaps the US Dollar’s post-election moon shot could be due for a crude-friendly pause as well.
OPEC production was already tightening in December
Estimates for OPEC’s December output started rolling in this week including from Bloomberg who pegged the cartel’s production at 33.1m bpd for a 310k bpd m/m excluding Indonesia who suspended their membership in November. Nigeria lead the way in m/m declines in December with a 230k bpd drop to 1.45m bpd. Algeria, Angola, Iraq, Iran, Kuwait, Saudi Arabia and Venezuela also added m/m declines ranging from 10k bpd – 60k bpd. Bloomberg estimates that Saudi’s have reduced production by 180k bpd over the last five months. Libya’s output for the month increased 50k bpd to 630k but estimates for the last 1-3 weeks from sources including Reuters peg the country’s output closer to 700k bpd. Away from OPEC, Reuters estimated Russian production flat m/m in December at 11.2m bpd which matched its 30yr high set in November.
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Prompt brent spreads moved higher this week which was important to note opposite the expected production gains in Libya. In our estimation this suggests some degree of confidence among the larger trading houses that OPEC + non OPEC exporters will make good on their agreement to tighten the market. In the front of the curve Brent H17/M17 rallied from a low of -1.70 on Tuesday to a weekly top at -1.47 on Thursday. Further back in the curve Brent M17/Z17 fell from -0.20 to -0.50 before bouncing back to -0.34 and appears to be in a consolidation period following its $2 rally from mid November to mid December.
WTI spreads moved in a more bearish pattern this week due to another large inventory build in the Cushing hub. Going forward we continue to believe that the currently wide WTI-Brent arb will drive exports higher and take some pressure off of Cushing. This past week US exports climbed by about 60k bpd to 686k bpd representing a four month high. For now though, the story remains bearish with WTI H17/M17 falling to a weekly low of -2.09 while WTI M17/Z17 dropped to a weekly low of -0.85.
In diff markets the main story to us this week was more bearish action in the WTI-Brent trading, with Cushing stocks looking increasingly bearish against brent fundamentals. The H17 contract traded down to -2.32 on Thursday which was its lowest mark since December 2015. In Texas Midland-WTI weakened somewhat to +0.90 for a 50 cent lost over the last two weeks. Up north, Bakken-WTI spiked from -150 to -40 for reasons we were unable to uncover.
Hedge funds get bullish gasoline
COT data for the week ended Dec 27th showed another quiet week in terms of WTI and Brent positioning. NYMEX WTI net length held by fund increased by 2k contracts to 308k which is basically unchanged over the last three weeks. ICE Brent net length was essentially unchanged w/w at 455k with equal additions to gross length and shorts of 8k contracts.
Unlike crude oil, speculators seem to be on the move in going long refined products. Net length in NYMEX RBOB jumped about 20% w/w to 50k contracts for its highest mark since February 2015. In NYMEX heating oil net length jumped to 33k contracts and has more than tripled in the last five weeks. ETFs revealed a more bearish attitude as the USO saw its fifth straight week of outflows for the week ended December 30. W/W outflows reached $135 million last week and totaled $800 million in December.
After bout of depression, volatility is on the rise
Crude option volatilty moved to its highest level in three weeks on Wednesday with help from a sharp early-week selloff in flat price. By midweek WTI H17 50d options priced at 31% implied vol while 25 delta puts priced at 33% and 25 delta calls implied 29% vol. The 4% skew represented a more modest put skew for flat price options than the 5% – 6% premium seen in recent weeks. Demand for calls generally has remained light, however, as evidenced by wingy 10 delta calls still pricing below at-the-money strikes.
EIA stats lay an egg
• Cushing stocks jumped more than 1m bbls to an eight month high at 67.5m bbls
• PADD IB gasoline stocks jumped more than 2m bbls and implied gasoline demand sank to a three month low
• Distillate stocks jumped by 10m bbls and implied distillate demand fell to its lowest mark in two years
• US crude stocks fell 7m bbls w/w bringing overall stocks higher y/y by 6% over the last four weeks. The decline in inventories was entirely due to a 6.9m bbl w/w drop in imports concentrated in PADD III while exports also jumped to a six month high at 686k bpd. Unfortunately the bullish news seemed to end there as Cushing stocks jumped to over 67m bbls and crude production maintained recent gains at 8.77m bpd.
Refiner inputs also offered a slight glimmer of hope by jumping 132k bpd to 16.69m bpd. Overall inputs are flat y/y over the last four weeks which still looks disappointing to us in our quest to find bullish spots in the market. Refining margins also moderated this week giving back some recent gains. The WTI 321 crack below $16/bbl this week and in the USGC the LLS 321 crack dropped to $13/bbl. In Europe the Gasoil/brent crack dropped to $10/./bbl
Gasoline data for last week was, in a word, bad. Overall stocks 8.3m bbls (+1.5% y/y) including a 3.2m bbl build in PADD IB (+13% y/y), a 1m bbl build in PADD II (-5% y/y) and a 3.4m bbl build in PADD III (-0.8% y/y.) Much of the builds seemed due to an almost hard to believe drop in domestic demand of 813k bpd and drop in exports of 153k bpd. Despite the weak numbers domestic demand is still +3.8% y/y over the last four weeks and exports are +111% y/y over the last four weeks.
Gasoline futures moved sharply lower to begin the week with the G17 contract dropping from $1.70/gl to $1.63/gl. Yesterday’s unusually bad EIA report created a short-lived dip to $1.61/gl before futures jumped back to $1.64/gl. Spread markets also weakened for gasoline in the front of the curve while RBOB M17/Z17 was mostly flat near +24 cents.
US distillate data was also exceptionally bearish this week beginning with an extraordinary overall inventory build of more than 10m bbls (+1.4% y/y.) PADD IB somehow missed the carnage with a modest weekly draw but PADD II added 2m bbls w/w (+1.5% y/y) while PADD III added 5.8m bbls (-0.3% y/y.) Distillates also suffered an extreme drop in demand with domestic consumption falling nearly 30% w/w to 2.8m bpd while exports fell 15% w/w to 1.2m bpd.
Heating oil futures were essentially flat on the week despite the aforementioned bearish EIA report and even made their highest print since July 2015 on Tuesday at $1.76/gl before moving lower to $1.70/gl. Spread markets, however, did move lower on the poor stat report including HO M17/Z17 which dropped from -4.5 cpg to -5.5 cpg.
In overseas product markets gasoil M17/Z17 traded near -$11/t on Thursday for a $3 loss in the last few weeks. The spread is still higher by about $8/t since its recent low in mid-November. Gasoil stocks in the Amsterdam-Rotterdam-Antwerp hub jumped about 5% w/w but are still lower y/y but are still lower y/y by about 18% and lower by 23% YTD after rising by 18% in 2015. Singapore distillate inventories fell more than 4m bbls w/w and are now lower y/y by 15%.
United States Oil Fund LP (ETF) (NYSE:USO) closed at $11.68 on Friday, down $-0.02 (-0.17%). Year-to-date, USO has declined -0.34%, versus a +1.65% rise in the benchmark S&P 500 index during the same period.
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