• WTI traded in a bearish pattern once again this week taking out last week’s low print and settling $43.41 on Friday following an IEA report with bearishly adjusted supply/demand expectations, a strong USD which sent the DXY to its highest mark since February and further skepticism that OPEC producers will come to a meaningful supply cutting agreement later this month. Prompt spread markets in WTI and brent also continued to decry high levels of existing supplies falling to fresh contract lows while 2H’17 crude spreads as well as spreads in gasoline, heating oil and gasoil told a much more constructive story. We continue to hold a moderately bullish view of oil at the moment expecting a $47-$55 range based on:
1- Tightening gasoline, gasoil and distillate stocks in ARA, NYH and Singapore which are falling back in line with y/y norms opposite modest demand gains
2- Improved refiner margins back to seasonal norms ($13/bbl for WTI 321, $11/bbl for gasoil/brent) in the US and Europe heading into a ~1m bpd seasonal uptick in US refiner demand
3- Geopolitical risk to barrels from Nigeria, Venezuela and Libya. We continue to view output gains in Nigeria and Libya as climbing a slippery slope as serious threats to exports endure
4- Expected bullish money flows in the low $40s (USO enjoyed its largest w/w inflow last week since February) with managers hesitant to be short oil heading into the Nov. 30 meeting
5- Market sentiment tilting slightly back towards the possibility of an OPEC deal being made as the interests of cartel members align and core members + Russia approach their output capacity
• Away from the oil markets this week’s extraordinary political events in the US were sharply bearish for US bonds (US 2yr yield back over 0.9% for the first time since the post-Brexit melt-up) and supportive for equities with investors convinced that the Republican sweep of the White House and Congress will lead to massive fiscal stimulus and increased deficits. We would guess that that the short term geopolitical ramifications of this week’s election were- if anything- bullish and would note that December 14th Fed rate hike appears to be on track with Fed Fund futures seeing an 81% chance of a benchmark increase.
Pain continues for prompt WTI spreads
Front WTI 1-month spreads traded down to contract lows this week under stress from resilient US output, high levels of imports and high inventory levels in PADDs II and III. US production estimates from the EIA were especially bearish at 8.69m bpd following the STEO’s second large upward revision to production estimates in the last four months. Canada’s increase in rigs from 8 to 89 since April has also contributed to steadily increased PADD II imports since June and a breakdown in WCS-WTI to 2016 lows at $-15.30/bbl.
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The US rig count also increased to 452 this week for a 43% jump since April. On a more bullish note producer hedging activity continues to decline in both NYMEX WTI and ICE Brent as their respective Cal’ 17 swaps fell to $47.50 and $49.
As a result of the aforementioned bearish pressures WTI Z16/H17 fell to a contract low on Thursday at -2.29 for a 99-cent loss from its October high. WTI CSO activty also saw signficantly bearish activity in 1Q’17 with strong put interest from a variety of players on the -0.75, -1.00 and even -1.50 strikes. Further back in the curve, however, things continue to look more bullish for oil with the M17/Z17 spread yielding just 24-cents per month of contango.
Brent spreads followed a similar path this week with the month 1 – month 3 spread falling as low as -2.12 on Wednesday for a $1 loss from early October. In physical markets traders cited a steady flow of barrels from core OPEC, Libya, Nigeria and steady North Sea loadings as causes for the weakness in prompt brent. Like WTI, the M7/Z7 contract traded in a more narrow range from -1.80 to -2.00 and bounced to -1.85 on Friday.
Vol rallies, skew flattens on continued flat price selloff
Option premuims rallied again this week with WTI H17 50d vol moving to 40% for an 8-vol move over the last three weeks. This looks somewhat rich to us against a 27% realized volatility (20-day basis) but our assumption is that heading into OPEC demand for options will stay elevated and continue to support high levels of implied volatility. As for skew even if flat price is calm. The curve remains bearish with extremely weak demand for wingy calls while 25d puts traded at a 6-vol premium to 25d calls.
Fast money still bearish, USO disagrees
Last week’s COT data for hedge funds showed increased liquidation of long positions in WTI and Brent while bears grew more bold. In NYMEX WTI net length fell to a 6-week low at 234k contracts for a 20% increase over the last three weeks. Net length dropped by 34k w/w with help from a 6k addition to gross short positions. In ICE Brent, net length fell to 346k (-30k w/w) for a 12% drop over the last four weeks with help from a 25k addition to gross shorts.
Refined product and ETF flows were much more bullish than anything revealed in WTI or Brent. Hedge funds added to their net length in RBOB for a ninth straight week bringing their net position to +41k contracts. Heating oil length also grew by more than one third w/w and currently stands at 17k. USO flows for the week ended November 4th showed a net inflow of $269 million which was the largest weekly buying effort in the ETF since February.
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Refiner demand, product draws lead solid EIAs
• US crude stocks added 2.4m bbls w/w due to inflows in PADDs II and V while Cushing stocks are flat near 58.5m bbls
• Refinery demand made a strong 369k bpd w/w jump. Inputs have increased by 447k bpd in the last four weeks and can be expected to add another ~1m bpd in the coming weeks.
• Gasoline (-2.8m bbls w/w) and distillates (-1.9m bbls w/w) also continue to tighten towards historically normal seasonal levels.
US crude stocks added 2.4m bbls w/w and are now higher y/y by 6.6%. PADD II inventories are higher y/y by 4% following a 1m bbl build and PADD III stocks are higher y/y by 8% following a 1m bbl draw. Cushing stocks were essentially unchanged at 58.5m bbls. One of the more bearish aspects of the report was a 170k bpd increase in production to 8.69m bpd which was its highest mark since June.
Refiner demand enjoyed a sharp w/w jump of nearly 400k bpd to 15.8m bpd. Inputs are lower y/y by 0.4% over the last four weeks and utilization’s jumped nearly 2% w/w to 87.1%. Crack margins in the US moderated with the WTI 321 falling to the $13/bbl area while gasoil/brent continued to climb towards $11/bbl. The LLS 321 crack traded near $8/bbl. Historical data suggests that refiner demand should grow by roughly 1m bpd in the coming weeks.
US gasoline inventories fell 2.8m bbls w/w and are currently higher y/y by 3.6%. This week’s data included a 5.3m bbl draw in PADD I (-4.6% y/y) and a 3.7m bbl build in PADD III (+13% y/y.) PADD IB inventories fell 1.5m bbls w/w and are lower by 7% y/y. Domestic gasoline demand increased to 9.2m bpd w/w but is lower y/y by 2% over the last four weeks. Exports at 1.1m bpd are higher y/y by 144%.
RBOB futures continued to trend negatively this week moving below $1.33/gl for the first time since August to complete a 30-cent drop since their Colonial peak over $1.60/gl. Futures lost nearly 10-cents just this week. In spread markets RBOB Z16/H17 was essentially flat near -3 cpg.
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US distillate supplies fell 1.9m bbls w/w and are now higher y/y by 5%. PADD IB inventories were essentially flat w/w at 40m bbls and are higher y/y by 7%. PADDs IC and II were mostly responsible for the weekly draw with w/w decreases of 1.1m bbls and 1.3m bbls, respectively. Distillate exports at 1.1m bpd are lower y/y by 2% while domestic demand at 4m bpd is higher y/y by 6%.
Heating oil futures sank to $1.41/gl this week for a 20-cent drop over the last month. Prompt heating oil spreads were mostly flat with HO Z16/H17 moving around the -4.5 cpg area.
ARA product data was mixed this week with gasoil stocks declining while fuel oil had a large w/w build. ARA gasoil stocks fell 24 k mt w/w and are lower y/y by 16%. Fuel oil stocks jumped 100 k mt (nearly a 17% w/w) and are lower y/y by 50%. Further east, Singapore light + middle distillates + residues fell by 1.2m bbls w/w and are lower by 3%.
By SCS Commodities Corp.
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