- In recent notes we’ve cited output gains in Libya, stubbornly high Cushing inventories and OPEC skepticism as the key bearish culprits keeping a lid on an otherwise tightening crude market. This week we have another item to add to that list: a flood of imported oil into the US Gulf Coast. Wednesday’s EIA report revealed a larger than expected crude oil inventory build of 5m bbls due to a staggering 4m bpd of imports (4yr high) into the US Gulf Coast. Crude oil inventories in PADD III are now higher y/y by 14% as a result of the elevated imports and a spike in floating storage to more than 8m bbls in the Houston area suggests that the PADD III status may temporarily be even more bearish than it appears. Houston area congestion is obviously keeping more barrels in Cushing and pressuring WTI spreads and differentials. However, we ultimately repeat our constructive view of the market and expect the PADD III glut to pass in the coming months with help from large OPEC cuts concentrated towards US customers and record-high US crude exports at +700k bpd driven by generous WTI-Brent arbs.
- We still expect to see crude prices move to a $56-$61 range and noticed several fundamental bright spots this week while WTI essentially moved sideways near $53. Firstly, prompt Brent spreads performed well through Thursday as preliminary estimates from BMI Research suggested that OPEC + non OPEC exporters have been 73% complicit with their combined 1.8m bpd of production cuts. On Thursday Brent m1-m2 reached a 1-month high at 42 cents contango and Brent M17/Z17 offered just 5 cents contango per month which should accelerate the movement of barrels out of storage in 2H17. Secondly, after discussing the aggressive y/y draw downs in ARA gasoil and fuel oil and also Singpore distillates for the last few months, US product stocks have also started to moderate with US gasoline stocks now flat y/y and US distillate stocks at a y/y surplus of just 3% (yes, they are flat y/y at higher levels but this still suggests that the worst of the inventory expansion should be behind us.) PADD II has looked particularly tight for products with distillates in the region now lower y/y by 1.3% while gasoline stocks in the Chicago area are lower y/y by 10%. On the demand side we also saw a positive sign this week as US refiner inputs printed 17.1m bpd for its highest mark ever.
Bears beware- Brent spreads are on the move
Brent’s prompt 1-month spread moved from a weekly low on Monday at -62 cents to -42 cents on Thursday as optimism increased that key OPEC + non OPEC exporters are complying with production cuts. As we noted earlier BMI Research sees production cuts totaling roughly 1.3m bpd so far in January which in our estimation will lead to moderating supply builds this winter and aggressive draws in the spring. Reuters reported on Thursday that Saudi Arabia has cut production under 10m bpd for the first time since February 2015 and that Iraq’s production cut of 170k bpd so far in January was about to be increased to 210k bpd. The same source also sees Russia cutting production by about 150k bpd. We see additional signs of physical market strength in the Dated Brent v. Front Line Brent differential which reallied to -1.00 on Thursday for a 95-cent rally in the last two months and its highest print since September.
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In the US, WTI spreads and WTI-Brent arbs continued to suffer from elevated Cushing stocks despite a jump in exports of US crude to 727k bpd last week and a drop in Cushing stocks of 579k bbls. In spread markets WTI H17/J17 printed -0.87 on Monday for a 50-cent loss in just the last three months. In WTI-Brent arbs the prompt H17 contract managed to stay above its contract lows from last week at -2.32 but failed to sustain a rally to -1.90 on Wednesday and sank to -2.20 by Thursday afternoon.
US crude production continued to surge higher this week with a print of 8.95m bpd- its highest mark in nine months and remarkable rebound of more than 500k from its July low. The US rig count also continued its run higher last week increasing to 529 for a 67% increase since June while hedging from producers climbed via the COT NYMEX WTI producer/merchant gross short from 614k contracts to 652k.
Implied vols mostly flat near 30%
Crude option volatility firmed slightly w/w on Thursday with WIT H17 at-the-money volatility hovering between 29%-31%. The bearish skew of course remained in tact with 25 delta puts pricing at 34% while 25 delta calls implied 29% volatility. 10 Delta wingy calls also continued to trade at a discount to all other strikes in the curve making bullish long-vol plays relatively affordable. The OIV index has traded in a 29%-33% range this week and several of our clients were surpirsed by the lack of movement in volatility as flat price WTI recently sold off from $55 to $51. Realized volatility (20-day measure) headed lower yet again this week and at 26% makes stubbornly low implied vols seem realtively overpriced.
Funds keep bullish foot on the RBOB
Net length in NYMEX WTI and ICE Brent was basically left untouched last week. In NYMEX WTI net length fell from 308k to 304k while in ICE Brent net length increased from 455k to 458k. Net length between the two combined contracts has increased by 62% since September. Gross short positions for both contracts were also basically left alone and currently sit near 12-month lows.
We did see some real re-positioning in refined products, however, as RBOB net length jumped more than 20% w/w to a new 2yr high at 61k contracts. Heating Oil flows were also positive with net length increased by about 16% w/w to 39k contracts. In ETF worls the USO saw net inflows of $6 million last week breaking a streak of five straight weeks of outflows which utlimately totaled $802 million.
Imports drive more large builds in Crude + Gasoline
- US crude stocks added more than 4m bbls w/w as PADD III imports jumped to a four year high above 4m bpd
- Gasoline stocks jumped more than 5m bbls with help from 535k bpd of imports into the eastern US
- Distillate stocks jumped more than 8.4m bbls w/w and have increased by 18m bbls over the last three weeks
- Bulls can take solace in a sharp jump in refiner inputs to an all-time high of 17/1m bpd
US crude stocks jumped 4m bbls w/w putting inventories higher y/y by 7% over the last four weeks. PADD II stocks fell by 648k bbls (+3.8% y/y) while PADD III inventories added 5.8m bbls (+14% y/y) and Cushing stocks fell by 579k bbls to 66.9m. Production made a bearish jump of 176k bpd to 8.95m bpd which is its highest level in the last nine months. Most of this week’s build was due to a sharp jump in imports. Overall imports jumped to 9m bpd and are higher y/y by 6% over the last four weeks. PADD III imports at 4m bpd were their highest level since 2013.
Refiner demand was one of the few bright spots of this week’s report and followed an extremely lackluster December with a jump to an all-time high of 17.1m bpd. Overall imports are higher by 1.2% y/y over the last four weeks and utilization at 93.6% is higher y/y by 0.1%. Crack margins were generally flat this week with the WTI 321 crack near $16/bbl and while gasoil/brent traded $11/bbl.
Related: China's Oil Import Dependency Deepens
Gasoline inventories jumped 5m bbls w/w (flat y/y) due mostly to 2m bbl builds in PADDs I and V. PADD IB stocks added 1.7m bbls on continued heavy imports and overall east coast inventories are higher y/y by 7%. PADD II inventories are lower y/y by 10% and PADD III gasoline inventories are flat y/y. Gasoline demand disappointed for a 2nd straight week with domestic consumption at 8.5m bpd (flat y/y) while exports fell slightly to 981k bpd which is higher y/y by more than 105%.
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US distillate inventories suffered their third straight sharp jump- this week for 8.4m bbls. Overall distillate stocks are now higher y/y by 2.7%. PADD IB stocks added 131k bbls and are higher y/y by 5.5%, PADD II inventories are lower y/y by 1.3% following a 1.3m bbl draw and PADD III stocks are higher y/y by 8.7% following a 6.7m bbl build. Domestic distillate demand jumped 406k bpd to 3.2m bpd w/w and is higher by 13% while exports at 1m bpd are lower y/y by 14%.
ARA refined product data showed builds across the board this week. Gasoline inventories added 75k mt and are higher y/y by about 10% making it the only product which looks oversupplied in Northwest Europe. Fuel oil stocks jumped by 83k mt and are lower y/y 43%. In ARA’s largest market, gasoil stocks jumped 120k mt but are lower y/y by about 20%. Gasoil spreads seemed unconcerned with the inventory builds though as the H17/J17 spread jumped to -3.50/t.
Further east, Singapore’s distillate inventories added more than 3m bbls this week which was bearishly compouded by a jump in 1.5m bbls of floating production storage in SE Asia.
By SCS Commodities Corp.
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